Naver Corp Ord

Good morning. We will now begin Naver's 2024 Q3 earnings conference call. For the convenience of our investors joining from home and abroad, we will provide simultaneous interpretation for the presentation and switch to consecutive interpretation for the Q&A session. Analysts, investors, good morning. I am Paul Choi from the Capital Markets Office. Thank you for joining Naver's Q3 2024 earnings call. As always, we have CEO Suyeon Choi and CFO Namsun Kim joining us on our call today to provide an overview of our business status, strategy, and financial performance, after which we will entertain your questions. Please note that the earnings results are KIFRS-based, provided for timely communication, and have not yet been audited by an independent auditor, and hence are subject to change after such review. With that, I will turn it over to our CEO to present on the business highlights. Good morning. I am Suyeon Choi, the CEO. In the third quarter, Naver not only strengthened its search capabilities based on AI and data, but also expanded hyper-personalized services that deliver content tailored to users' interests, continuing the effort to enhance the platform with a balanced focus on search and discovery. To respond to the recent reshaping of the e-commerce market, we have been carefully preparing various measures to strengthen Naver's advantages and address its weaknesses. As a first step, we launched the Naver Plus Store at the end of October to enhance the discovery and exploration experience of preference-based products, and it has been well-received for its intuitive UI and UX with improved user convenience. We will continue to put effort into advancing our logistics capabilities and enhancing membership benefits to further strengthen our competitiveness. We will also continue to develop Naver's spatial intelligence technology to discover new drivers of future growth. Naver Labs' spatial intelligence technology powered by its differentiated positioning technology was first introduced in Korea through its VR real estate tour service in 3Q. Overseas revenue from providing digital twin solutions for the Saudi Ministry of Municipal Rural Affairs and Housing was generated for the first time this quarter. We plan to create new business opportunities by integrating on- and offline experiences such as place maps, real estate and digital twin, and various local and spatial services through the application of generative AI. Let us take a closer look at our search platform performance. As for the search platform in the third quarter, efforts to enhance the platform's competitiveness including strengthening search capabilities using AI and data and expanding time spent through the introduction of short-form and feed services have paid off, resulting in double-digit growth for the first time in 10 quarters. In recent years, various generative AI-based search services have evolved, from answering questions with trained data to providing responses using the latest information on the web, increasing the importance of securing quality search data as well as AI performance. In response, Naver is also improving its search performance by expanding the number of indexed documents in its database by 50%, with a focus on enhancing reliability. In the third quarter, we strengthened the indexing and search of credible data from public institutions, which led to an increase in the number of clicks on relevant sources by more than 30%. And by increasing the visibility of specialized cafe content sources, Improving image indexing quality and enhancing video search performance, we aim to improve the accuracy of long-tail queries so that it leads to increased traffic. Based on this extensive and up-to-date data, we plan to expand the AI briefing feature to mobile comprehensive search next year to better understand user intent and context to provide direct answers to search queries in a concise summary format. At last August's Team Naver conference done, Naver introduced its generative AI search queue, which began testing on PCs. Since then, the focus has been on improving response speed and quality. The AI has continued to evolve with internal testing now completed for multimodal features that enable search by image and voice. Just like the AEI briefing results that summarize data from trusted sources, we plan to provide, in the coming year, an immersive experience on mobile, enabling users to take action based on search results that align with their purpose. In addition, Naver is expanding its feed service to enhance the flow of personalized content discovery, making it easier for users to find and explore tailored content across the platform. Since June, Naver has been testing sports and entertainment feeds with select users, and as of October 31, these feeds are now fully available. Also, Naver has introduced the new search feed, which connects search results to a variety of content based on real-time user responses, transforming traditional search into a discovery and exploration experience. In order to secure quality content that enriches users' discovery and exploration experiences within the expanding feed space, we are also introducing various content creator development programs. Naver blog, which celebrated its 24th anniversary this year, has seen unique text-based content become a trending cultural phenomenon with the proportion of its users between 10 to 30 reaching 50. 64% of the total user base. Recently, through a challenge encouraging users to document their daily lives with text and images, we have secured content on a diverse range of topics. The largest share of content produced has been in place reviews such as travel, restaurants, and events, exhibitions, areas where Naver has strong expertise, and this focus is expected to create synergies with our mapping service in the future. Through the third batch of clip creators recruited in August, we have been producing an average of 35,000 pieces of content per month, enabling us to secure video content across various topics. Similarly, with the Feed Maker program launched in October, Naver selected 700 creators with a focus on fostering creators to produce high quality blog on blog content and the contents gathered through this process are organically recommended and displayed tailored to individual interests powered by ai technology across various never platforms including home feed blog search explorer tab and feed and as a result the average daily time spent on never mobile main page for q3 grew by more than 10% YOY just like the previous year demonstrating its competitive strength. Specifically, daily visitors to the home feed have risen steadily since last quarter and both the number of visits per person and the click conversion rate for content in home feed have also increased significantly since the beginning of the year. For CLIP, monthly average daily play count increased by 50% QOQ, and the daily play count per person also grew by 81% year-to-date. Clickers which were introduced to strengthen the linkage between CLIP and neighbors' vertical services have shown high usage rates. with place and shopping tags accounting for 47%. In particular, with place stickers, users were naturally directed to tagged locations on clips, leading to further actions like reservations and orders via the maps and pay services. Similarly, for shopping stickers, we observed a virtuous cycle where users transition from product recommendations to the purchase pages. Naver is also focused on strengthening the competitiveness of its ad platform. In line with the gradual expansion of its feed service, we are consistently launching highly effective ad products and improving ad efficiency through AI-driven targeting enhancements. Feed ads have proven highly effective, achieving an average click conversion rate more than five times higher than standard banner ads due to enhanced targeting. In particular, Naver Dynamic Ads, which use AI to display personalized ads based on user shopping data, continue to stage high performance with a CTR over three times that of other feed ads. As a result, feed ads have been well received by both advertisers and users and are driving an influx of new display advertisers. Naver is currently working on enhancing tools that automate ad execution to optimize efficiency within the budget set by advertisers, and as a result, The boundaries between search ads and display ads are expected to gradually blur. Furthermore, Naver will continue to enhance its AI-based tools for advertisers and introduce compelling products based on advanced targeting to solidify its position as a platform that satisfies both users and advertisers. Next, I would like to share with you the status of our commerce business. In 3Q, Naver's total commerce GMV reached... 12.5 trillion won up 4.3% YOY, of which on-platform GMV, excluding outlink marketplaces, grew by 10% YOY. With the recent reshaping of the e-commerce market, there has been a growing preference for trusted platforms, leading to a continued expansion of sellers and brands using Naver. In the services segment, despite the normalization of the travel bubble post-COVID, travel GMV growth has continued and worsened. Orders and bookings are performing well, supported by search enhancements and effective response to peak holiday demand. Our brand-driven expansion of guaranteed delivery is recording strong GMV growth, continuing from Q2 to Q3, backed by enhanced user benefits and seller convenience. Since the introduction of free shipping with guaranteed delivery for membership users, the GMV of the service among members have grown by nearly 50%. For sellers using the free exchange and return services, GMV increased by almost 40% compared to before the service was introduced, contributing to increased transaction activity. In addition, for sellers who face challenges in adopting guaranteed delivery, we have supported them by enabling direct delivery from their warehouses and simplifying the contract process to improve convenience. This has led to positive feedback across various categories including digital home appliances, fresh food, and daily necessities, leading to a sharp increase in coverage. Furthermore, we will continue to enhance the overall quality and speed of delivery by introducing Sunday delivery and expanding same-day delivery services. In the case of Poshmark, growth has slowed due to a sluggish North American C2C market, but it still shows solid traction compared to our competitors. Despite the challenging market environment, we've seen good response to our 1P ads, resulting in increased ad revenue, and we have launched a smart list AI tool powered by PoshLens, which will make it easier for more sellers to register their products. On October 30th, we launched Naver Plus Store with enhanced product exploration, discovery, and hyper-personalized experiences. Naver Shopping, which began as a price comparison service in 2003, has grown from an online store platform for SMEs in 2018 to a powerful commerce platform by expanding its capabilities to support D2C for brands in 2020. With the addition of the Naver Plus store, we aim to continue on with this evolution. For consumers, Naver will offer an advanced shopping experience based on AI enhancements, providing a new level of shopping experience tailored to individual needs. In addition to Naver's strength in intent-driven shopping search, the platform will evolve into an intuitive, user-friendly, technology-driven commerce platform that helps consumers easily discover preferred products and receive personalized recommendations, including AI-driven purchase guidance. For sellers, Naver will support brand analysis, marketing, customer management, and price management through data and solutions that only Naver can provide, transforming itself into a relational commerce platform that makes it easier to attract and engage new, loyal, and potential customers. Furthermore, we plan to enhance benefits for PLUS membership members within the Naver ecosystem and expand benefits outside the ecosystem as well. Within the Naver ecosystem, the free shipping and free exchange return benefits of the guaranteed delivery product, which were tested for three months starting in August, have shown positive results. with increased GMV and higher user satisfaction without significantly impacting profitability, and thus these benefits were officially introduced in November. We will also expand exclusive offerings for membership customers such as super rewards and special deals to provide personalized benefits tailored to individual preferences. Furthermore, outside of the ecosystem, we plan to expand further by offering powerful contents like Netflix and endless benefits in offline spaces such as department stores, convenience stores, airports, and movie theaters. By leveraging Naver's unique strengths, we plan to launch the new Naver Plus store as a separate app in the first half of next year to further enhance the hyper-personalized shopping experience. We will continue to develop the platform into one that satisfies customers, sellers, and partners alike. Next, allow me to provide an update on our fintech business. In 3Q, NaverPace TPV reached 18.6 trillion won, an increase of 22.1% YOY and 6.2% QOQ. Non-captive TPV driven by the continued expansion of our third-party ecosystem through the addition of new merchants grew by 38% YOY to 9.6 trillion won. Offline TPV grew. 78% YOY to 3.1 trillion won backed by the growth of on-site and order and booking payments. In the platform business, we are continuously expanding our lineup of loan and insurance comparison services with the launch of rent loans and international travel insurance comparison services. The total volume of the loan comparison service continues to grow with the expansion of offerings including credit loans, mortgage loans, and rent loans, and the cumulative volume for NeverPay's home mortgage and rent loan comparison service launched earlier this year has surpassed 3 trillion won. Going forward, we plan to further expand the lineup of loan and insurance comparison services and enhance user convenience, allowing financial consumers to compare options quickly with convenience through Naver Pay, reduce financial costs, and enjoy additional benefits. Moving on to Webtoon's third quarter results. In the first full quarter, as a public company, Webtoon's Q3 revenue recorded $424 billion, increasing 11.6% YOY and 10.7% QQ. On a constant currency basis, excluding the consolidated and transferred operations as reported by Webtoon earlier this morning, revenue grew 13.5% YOY, continuously strengthening its position as the leading storytelling technology platform. Breaking it down by segment, paid content revenue increased 12.7% YOY, while paid ARPU grew 14.7% YOY, representing continued success in driving paying user engagement. Advertising revenue grew 24.3% YOY, driven by double-digit growth across all regions, and IP adaptation revenue grew 5.3% YOY. Adjusted EBITDA improved significantly YOY, representing an adjusted EBITDA margin of 8.3% as a result of a more efficient marketing spend. Webtoon has more than... 120K episodes released daily in more than 150 countries as of the end of 2023, with approximately 170 million monthly average users now, and we remain focused on strengthening our global flywheel powered by our local creator, ecosystem, content, and IP. Lastly, I would like to elaborate on the business performance of Naver Cloud. Naver Cloud's B2B business is growing, centered on the continued delivery of NeuroCloud and LineWorks. The delivery of NeuroCloud equipped with HyperClovaX continued to progress smoothly in the third quarter, and we expect to finalize discussions on its adoption with companies that have signed MOUs such as Korea Hydro Nuclear Power by the end of the year. For Lineworks, the number of paid IDs grew by 13% YOY, leading to a 34% increase in revenue YOY. Going forward, we plan to expand our product lineup with diverse features to attract more customers and increase the number of paid accounts. In the case of Naver Labs' digital twin technology developed for future growth, the revenue from the project to build a digital twin platform with Saudi Arabia's Ministry of Municipal Rural Affairs and Housing was reflected for the first time this quarter ever since signing the contract in July, confirming that Naver's R&D for the future is leading to overseas monetization. Though still in its early stages, we see a wide range of opportunities in Saudi Arabia, not only for the digital twin business, but also for super apps, AI models, and data center development. Building on this foundation, we will continue to explore other global business opportunities. In Korea, we will build on Naver Labs' competitive positioning technology, which forms the foundation of Spatial AI to showcase differentiated features across Naver's diverse services, including places, maps, and real estate. For example, in Q3, we launched the Real Estate VR Property and Complex Tour service with Naver Financial as... an AI-powered 3D digital twin solution that recreates real-world spaces in detail, including the form and texture. Initially applied to 50 properties in five large apartment complexes in Seoul and the metropolitan area, this service allows users to explore property listings online with accuracy and convenience. On November 11th and 12th, Naver's second Team Naver Conference Time will be held. In this rapidly evolving AI era, Naver, being the only firm in the world with a business model that encompasses search, commerce, payments, and content, will be sharing more details on how it leverages its technological foundation to create new services and business opportunities, evolving into an even more valuable platform, and we ask for your interest and support in the event. Next, CFO Namsan Kim will walk you through the financial performance for the quarter. Good morning, I am Kim Namsan, or Namsan Kim, the CFO. Allow me to present the financial results for 3Q. In Q3, neighbors' revenue driven by accelerated growth in search platform and solid growth across all businesses, including commerce and fintech, increased by 11.1% YOY and 4% QQ, to 2,715.6 billion won. Operating profit continued its upward trend for the sixth consecutive quarter, with adjusted EBITDA showing growth for eight straight quarters. Notably, this quarter's operating profit achieved an all-time high. of 525.3 billion won, up 38.2% YOY and 11.1% QQ, thanks to the efforts focused on accelerating high-margin business growth and enhancing productivity. Operating margin also rose by 3.8 percentage points, YOY reaching 19.3%. Adjusted EBITDA, which excludes variables such as stock-based compensation and depreciation and amortization expenses, increased by 27% YOY and 9.5% QQ to 699.1 billion won. EBITDA margin improved by 3.2 percentage points YOY to 25.7%. It's particularly telling that operating profit grew by nearly 60% compared to 3Q 2022 two years ago. The structural improvements made to the business over the past two years have been successful, proving once again that revenue and absolute profit can grow in tandem. Next, let me discuss revenue by each business area. In Q3, the search platform grew by 11% YOY and 2% QQ, recording 997.7 billion won. This is an encouraging achievement, marking a return to Double-digit growth for the first time in 10 quarters since Q1 of 2022 when the company benefited from pandemic-related tailwinds. Search ad grew 9.5% YOY and 3% QQ driven by ongoing product improvements in Powerlink, brand search, and the introduction of bidding for place ads, as well as the expansion of external media offerings. Display grew 11% YOY with steady expansion in feed placements and the sale of highly efficient feed ads enhanced with precise targeting technology, but declined. 2.3% QQ due to the traditional off-season such as the summer holidays and Chuseok. Commerce revenue reached 725.4 billion won, up 12% YOY and 0.9% QQ. Of this amount, commission and sales revenue grew. by 24.6% YOY and 2.2% QQ, thanks to strategic collaborations with brands, enhanced user benefits, and improvements in delivery quality, resulting in increases in GMV for smart store travel and reservation services, bringing about higher usage of brand solution packages and the guaranteed delivery. Membership revenue increased by 5.1% YOY, driven by strengthened benefits for users, leading to growth in both members and active users. However, it was down by 2.6% QOQ due to the temporary impact of changes in accounting treatment related to some digital content. Fintech revenue stood at 385.1 billion won, up 13% YOY and 4.5% QQ. TPV, driven by the ongoing expansion of our third-party ecosystem, was up 22.1% YOY and 6.2% QQ, recording 18.6 trillion won, with the proportion of non-captive TPV continuing to expand to 51.3%, leading the growth, while offline TPV grew... 78% YOY backed by the high growth of order and reservation services and on-site payments. Content revenue was up 6.4% YOY and 10.2% QOQ to 462.8 billion won. In Q3, Webtoon, with a record high paid content revenue and a sharp increase in ad revenue in Japan, drove overall revenue growth with an increase of 11.6% YOY and 10.7% QOQ. For your information, on a constant currency basis excluding deconsolidated and transferred operations, Webtoon global revenue grew by 13.5% YOY. Snow's revenue decreased by... 46.5% YUI due to the impact of NaverZ at the consolidation being reflected, but the camera segment continues to see a steady increase in paying subscribers of AI features. Cloud revenue increased 17% YUI and 16.1% QQ to 144.6 billion won. B2B grew by 11.4% YOY, reflecting continued robust growth in paying accounts for lineworks and the recognition of NeuroCloud's revenue. Also, revenue from the Digital Twin Project with Saudi Arabia's Ministry of Municipal, Rural Affairs and Housing announced last quarter was recognized for the first time, contributing to the overall growth in other revenue, both YOY and QQ. Next is on expense items. Development and operation expenses remain stable up... 4% YOY due to the restructuring of the tech organization and efficient staffing. Partner expenses grows by 5.8% YOY and 2.3% QQ due to increased payment fees in fintech and webtoon businesses and infrastructure expenses grew 13.2% YOY driven by increased depreciation costs from the acquisition of new server assets, maintaining a stable ratio of approximately 7% of operating revenue. Marketing expenses grew by 7% YOY and 13.8% QQ and As was mentioned last quarter, we expanded promotions in areas such as commerce, where we determined that strengthening competitiveness was necessary. We are planning strategic and flexible execution to provide fundamental value to build a solid cohort. Next, let me discuss the P&L by business. First, in combined search platform and commerce, the accelerated growth of search and advertising offset the increased spending on commerce promotions, resulting in improved profitability YOY and QOQ. In the fintech segment, while payment revenue continued to grow, Profitability declined slightly, YOY and QOQ, due to the expanded promotions related to financial products and on-site payments. In the content segment, losses were narrowed as a result of revenue growth driven by paid content and ads in Japan, along with the continued impact coming from the deconsolidation of NaverZ led to narrowing deficits. Lastly, for the cloud segment, losses were narrowed driven by higher revenue from Lionworks and AI. Consolidated net profit for 3Q grew 19.5% YOY and 1%. 59.6% QQ to 530.1 billion won, reflecting the impact of bond translation gains and losses due to fluctuations in the USD exchange rate. Let me now move on to cash flow and balance sheet. Free cash flow in Q3, driven by more stable balance sheet management, increased by 223.7 billion won YOY and 141.9 billion won QQ to 387.1 billion won. Efforts to liquidate non-core assets over the past two years continued in 3Q, successfully executing over 1 trillion won in cumulative asset liquidations. Naver's consolidated adjusted debt-to-EBITDA improved. from 1.9 times at the end of Q3 2023 to 1.6 times as of the end of Q3 of 2024, following the receipt of approximately 800 billion won in dividends from Japan's A holdings. In particular, I would like to emphasize that despite the debt-to-EBITDA ratio being as high as 2.6 times at the beginning of 2023, Naver was able to recover from a net debt position to a net cash position through more rigorous and strategic balance sheet management and improved profitability from its core businesses. As a result, asset and capital efficiency, in other words, ROA and ROE, have been steadily improving. And we expect to be able to provide higher investment returns to our shareholders through wiser capital allocation and business operations going forward. Lastly, is an update on the recent special shareholder return program. In order to strongly enhance shareholder value, NAVER announced a special... shareholder return program involving share buyback and cancellation of its treasury shares in an amount equivalent to half of the $809.1 billion in special and regular dividends coming from the participation in the public tender offer for LY Corp's shares of Aholding at the end of September. Accordingly, from October 2 to 25, we successfully acquired approximately 405.1 billion won worth of Treasury stock representing 1.5% of the total issued shares and the acquired shares will be fully cancelled as of November 13th. This concludes the overview of Naver's third quarter financial performance and we will now receive questions. We will now open the call to questions. If you would like to ask a question, please press star and number 5. If you would like to cancel your question, press star and number 5. Please limit your questions to a maximum of two per person.

To begin the Q&A, if you'd like to ask a question, please press the star and number 5 on the phone button. To cancel a question, just press the star and number 5 again. Our first question comes from the line of Eric Chao with Goldman Sachs. Please ask your question.

Hello. Thank you for the question. First of all, congratulations on your success. There are two questions. The first is about the search platform. The acceleration of the search platform growth was very positive. Please explain in detail why this happened and what you think about the sustainability of this growth momentum, and what you think of the 4th outlook. The second question is about commerce. How has the change in user behavior changed since the launch of the first store? And how did the user feedback affect the fourth quarter? You said you're going to launch your own app next year. I'm curious about how you can minimize the impact of the search business, and how you can lead the shopping platform from the search platform to the shopping platform.