Kakao Business Strategy and Q1 Performance Summary

📈 Kakao’s Super App Evolution and Strategy for Increasing User Stay Time

• Competition among global platforms to expand user stay time share, centered on social and content, is intensifying in the recent mobile environment.
• Despite being the most visited mobile app daily, Kakao has a significant gap in user stay time compared to other companies.
• Kakao plans to enhance its content services and social functions to increase user stay time share through evolution into a super app.
• The Discovery area is planned to launch on the third tab of KakaoTalk, and it will activate content consumption through short-form videos.
• Content sharing features for daily life will be strengthened to improve user experience and expand engagement.

🤖 Kakao’s AI Service Expansion Strategy

• Kakao aims to launch popularized user-facing AI services this year to build a sustainable business model.
• The new Kanana app will feature a hyper-personalized AI mate function, strengthening context understanding through the accumulation of user interactions.
• Based on individual and group contexts, Kanana plans to link various B2C service data to enhance the hyper-personalization level of the AI mate.
• This beta test aims to verify service stability and user needs, and will proceed in a way that motivates data accumulation for improving user experience.
• Kakao plans to integrate the branding of the AI mate and AI generative search, thereby creating synergy with various AI services and increasing user engagement.

📊 Summary of Kakao’s Q1 Financial Performance

• Kakao’s consolidated revenue in Q1 was KRW 1.8637 trillion, a decrease of 6% year-over-year (YoY) and 5% quarter-over-quarter (QoQ).
• Platform segment revenue was KRW 993 billion, an increase of 4% YoY, but a decrease of 5% QoQ.
• KakaoTalk Biz revenue was KRW 553.3 billion, an increase of 7% YoY and maintained the previous quarter’s level.
• Integrated Commerce transaction volume was KRW 2.6 trillion, an increase of 3% YoY, but a decrease of 2% QoQ.
• Content segment revenue in Q1 was KRW 870.7 billion, a decrease of 16% YoY and 4% QoQ.

📊 Summary of Q1 Operating Expenses and Performance

• Q1 operating expenses were KRW 1.7583 trillion, a decrease of 6% YoY and 7% QoQ.
• Labor costs were KRW 478.9 billion, maintaining a similar level YoY due to a conservative hiring stance, and decreased by 4% QoQ.
• Marketing costs were KRW 87 billion, decreasing by 3% YoY and 16% QoQ due to efficient marketing execution efforts, and accounted for 4.7% of consolidated revenue.
• Consolidated operating profit was KRW 105.4 billion, with an operating margin of 5.7%. Q1 operating income/loss was recorded at KRW 77.6 billion.
• Total KPEX (Capital Expenditures) in Q1 was KRW 134.6 billion, of which KRW 102.8 billion was invested in tangible assets and KRW 31.8 billion in intangible assets.

📈 Advertising and Commerce Growth Strategy

• The advertising market showed no significant signs of improvement in Q1, and marketing cost reductions continued due to sluggish domestic demand and industry downturn.
• New advertising products are being prepared for the growth of the advertising business and are scheduled to be implemented in line with service reorganization in the second half of the year.
• To improve the profitability of video advertising, competitive video advertising products are planned to be launched in the Discovery area.
• The Gift Giving service continues to grow by leveraging relationships between users within KakaoTalk, and a new feature based on emotion-related keywords during conversations has been launched.
• Advertising revenue is expected to recover double-digit growth starting from the fourth quarter of this year, as new services become established.

Q&A and Further Details

5.1. Questions from DS Investment Securities

• Sung-ho Choi from DS Investment Securities raised two questions.
• The first question was regarding the advertising market conditions in Q2 and the growth strategy through AI and KakaoTalk reorganization.
• The second question was about the growth trajectory of Take Healthcare compared to GMB, inquiring about service reorganization plans and additional growth strategies.
• After the questions, Sung-ho Choi expressed his thanks.

5.2. Advertising Market Conditions and Strategy Changes

• No clear signs of advertising improvement were found in Q1, and marketing cost reductions continued, particularly in the commerce/fashion sector, due to sluggish domestic demand and industry downturn.
• Internally, there is a sense of crisis where maintaining or preventing a decline in revenue is difficult with the current service and product structure, and new advertising products are being prepared in the first half of the year to address this.
• With the introduction of PD1 advertising following the reorganization of the Discovery area, the goal is to achieve more than double the revenue compared to existing ad placements, aiming for growth in the advertising business.
• Due to the low revenue contribution of video advertising, video advertising products are being launched with the goal of securing significant advertising budgets.
• Advertising revenue is expected to recover double-digit growth starting from the fourth quarter of this year as new services stabilize, with steeper growth projected from next year.

5.3. Evolution of KakaoTalk Gift Giving Feature

• The Gift Giving feature on KakaoTalk continues to see growth in self-purchase transaction volume, strengthening the structure that naturally converts relationships and emotions within the daily platform into commerce.
• Chat rooms are representative spaces where users exchange congratulations and support, and Kakao has attempted an innovative change to connect this with Gift Giving.
• The new feature detects keywords such as congratulations and thanks during conversations, suggests appropriate gifts, and thereby enhances user convenience.
• Currently, approximately 1.9 million D-Day data points are generated monthly on KakaoTalk, and it is becoming a frequently used feature.
• Although daily sharing and interaction features are expected to be enhanced in the second half of the year, specific reorganization details are still being solidified.

5.4. Q2 Performance Outlook

• Ms. Jo A-young asked about the Q2 performance outlook.
• Analyst Jo A-young confirms the performance bottom has been reached and believes that a profit/loss rebound will begin from Q2.
• The platform segment maintains strong fundamentals, and favorable seasonal effects are expected in Q2 from various businesses including advertising and mobility.
• Overall, revenue growth and cost efficiency are expected to align.
• Analyst Jo A-young emphasized the possibility of a performance rebound through this explanation.

5.5. Second Half Growth and Positive Outlook

• For Talk Biz, the goal is to lay the foundation for accelerating top-line growth in the second half with the Q3 KakaoTalk reorganization and the launch of new business models.
• The IP pipeline for the Music business is strengthening compared to the previous quarter, and Piccoma is expected to continue structural improvements in profitability.
• While uncertainty in hit-driven businesses still exists, there is an outlook that the overall IP lineup for the content segment will be more positive in the second half than the first half.
• There is an expectation that positive impacts will emerge as the second half’s peak season begins.

5.6. Kakao Group Growth Strategy and Structure Reorganization

• Kakao Group is maintaining its growth strategy while pursuing efficiency, and the number of affiliates is expected to decrease from 147 to 104 as of May 2023.
• Management efficiency is being strengthened in areas with insufficient relevance to the group’s core businesses, which is a result of group structure reorganization.
• ROE calculated based on net profit attributable to controlling interests in the recent Q1 recorded 6.5%, a 3.5 percentage point improvement YoY, showing improvement even excluding one-off effects.
• Kakao is striving to re-accelerate the growth of Talk Biz and secure new future growth engines in the AI sector.
• Plans are to continue investments to enhance ROE in a sustainable manner.

5.7. Progress of Joint Project between Kakao and OpenAI

• Kakao and OpenAI are proceeding with a joint project under agreement, and detailed updates on this will not be provided.
• AI will evolve to perform complex tests with various services within the Kakao ecosystem not just through Q&A but also through function calls.
• Currently, both companies have agreed on the broad direction of the project and have commenced full-scale development collaboration.
• Kakao plans to leverage user experience targeting the entire nation to connect B2C services with agentic AI within the Kakao business ecosystem.
• It is expected that all users in Korea will be able to experience Kakao’s new agentic AI within the year.