Kakao Corp

KRX:035720

Earnings Call Transcript

[Operator]

Hello. Thank you for joining Kakao's Q1 and 2024 Earnings Conference Call. We will begin with a presentation by Kakao, which will be followed by a Q&A session. [Operator Instructions]I will now turn it over to Kakao.

[Jeffrey Shin, executive]

Good morning. My name is Jeffrey Shin from Kakao IR. Thank you for joining Kakao's earnings call for Q1 2024. I have with me today, CEO of Kakao, Shina Chung; and CFO, Kali Choi; and Head of Capital Markets, [ Kade Kim ].Please note that the earnings results are consolidated estimates under the K-IFRS basis and are subject to change upon the auditor's review. Also, as forward-looking estimates are based on assumptions, actual results may differ from figures included in today's presentation.We will begin with key business highlights for the first quarter presented by both the CEO and CFO, and end with Kakao's new direction forward and its AI strategy presented by Shina, the CEO, which I believe are the topics that the markets are most interested in.

[Shina Chung, executive]

Hello, I'm Shina Chung, CEO of Kakao. As it is my first earnings call as the CEO, I will briefly walk through key highlights of Q1 results and then present on Kakao new way forward. In the first quarter, Kakao's consolidated revenue reached KRW 1.99 trillion, up 22% year-over-year. Operating profit rose to KRW 120 billion, up 92% year-over-year. Despite a challenging external business environment, Kakao Talk Biz showed solid growth, demonstrating the company's core strength. However, increased investments in Kakao brands AI foundation model during the first quarter partially offset the financial restructuring gains made by Kakao Enterprise last year. On a positive note, several encouraging trends emerged this quarter that suggest profitability will improve throughout the year. Kakao Entertainment remains profitable and Kakao Pay reduced its losses as revenue from its securities and insurance business grew.Next, on Kakao's business highlights. On a stand-alone basis, Kakao's operating profit recorded KRW 138 billion. Although, this is 22% Q-o-Q decline caused by app business seasonality, which is usually a big profit contributor. Compared to KRW 121 billion reported last year, stand-alone OP was up 14% year-over-year, once again attesting to growth potential from the core business. Moving on to our overall operational updates of Kakao Corp. Kakao in 2024 still faces challenging operation headwind. It is hard to have clear visibility of an upcycle in the ad business, while domestic e-commerce landscape is undergoing a rapid transformation, which is adding on to the uncertainties of the Kakao's business. Nonetheless, thanks to the realignment of Kakao Talk over the years, Talk Biz outperformed the market growth. By expecting relationship building and interactions beyond the constraint of chat tab, we saw a rise in traffic and new inventory driving Bizboard to outperform the market despite being a display ad that are exposed to economic cycle.It is not early to mention that business messaging being Kakao's unique ad product that connects users and business partners for your messenger has been posting a double-digit Y-o-Y growth every quarter despite has been seen in the ad market since last year. All the Talk Channel message is actually an advertisement. User acceptance and conversion rates are outstanding. As such, we plan to actively expand the pool of advertisers this year. In our commerce business against the backdrop of fierce domestic competition triggered by entry of cross-border e-commerce players, we are driving growth, prevalence on Talk Gift offering unique relationship-based commerce experience. We will continue to broaden the context and relationship for gift giving and solidify product lineups by being the first domestic e-commerce platform to bring high-end global brands to Korea.In '24, we plan to focus on enhancing user messaging experience and identify new business model that is the best fit with the ethos of Kakao Talk like the Talk Channel and Talk Gift. This will be the underpinning of another leap for Talk Biz growth. To funnel Kakao's resources and capabilities, we undertook reorganization in Q1, and our goal is to enhance margin growth through the growth of Talk Biz, which is the biggest contributing business to Kakao's consolidated operating growth. Over the course of last year, we worked on improving the financial structure of Kakao Entertainment and Kakao Enterprise, with profit contribution have been relatively limited and we expect to see the results of such improvements to come through starting this year. Supported by sound financials, we will either downside losses or turnaround to profit depending on the financial position of the subsidiary or sustain gross profit and focus on achieving results, most appreciative for their stage of development.I will now turn it over to our CFO, Kali, who will present on details and share an update on key subsidiaries.

[Hye-ryung Choi, executive]

Hello. I'm Kali from Kakao's CFO. First, on key financial highlights. For the first quarter, consolidated revenue was KRW 1,988 billion, which was flat Q-o-Q and up 22% Y-o-Y. Platform revenue was KRW 955 billion, in line with last quarter and up 13% Y-o-Y. Out of this, Talk Biz revenue was KRW 522 billion, up 8% Y-o-Y, but down 3% Q-o-Q. Of the Talk Biz revenue, ad revenue was KRW 279 billion. While Business Message and Bizboard posted solid growth of 10% Y-o-Y on the back of seasonality, it was down 9% Q-o-Q.For Business Messaging, which includes Talk Channel and Notification Talk, we saw the number of active advertisers mostly from commerce and financial factors increase by 12% Y-o-Y. There has been a growing number of financial advertisers as we offer messaging templates and cost on skins, incorporating the needs of financial partners who consider security as a critical factor in customer communications. With enhanced products and templates using images and videos and as businesses are able to spend personalized and targeted ad messages, we are seeing more active marketing activities launched by advertisers, especially from the commerce verticals as they tend to go for a higher ad efficiency. Business Messaging posted Y-o-Y growth of 14% in Q1, and we expect the growth to be double digit this year.For Bizboard, despite it being sensitive to business cycle, leveraging the Bizboard CPT team, the Friends tab, they drove Y-o-Y growth of 11% on back of new products and inventory. Talk Biz ad business saw solid growth coming from the current set of products while we continue to explore new business model. Underpinned by the expansion of Kakao's local businesses, we are exploring services and products to better meet longtail advertisers' bearing needs. We are also developing a new type of messaging experience that combines chatting feature with AI, which can enhance usability.Next, Talk Biz commerce business revenue was KRW 244 billion, up 5% both Y-o-Y and Q-o-Q. Combined commerce GMV was up 7% Y-o-Y, reporting KRW 2.6 trillion. During the New Year holidays, Talk Gift ran sophisticated CRM marketing based on buyers' past purchasing history, which led to a growth in AOV, average order value and ARPU, which eventually drove 6% Y-o-Y revenue growth for Talk Gift and 7% GMV growth. GMV for Luxury brands posted 13% Y-o-Y growth on the back of gifting of luxury beauty products, fragrances and jewelry between family members and the loved ones during Valentine's and White Day.Talk Gift has expanded its circle of families and acquaintances to include strangers to share common interest and even brands that ones like, which shows that there is more opportunity for incremental growth. For example, we are seeing new gifting patterns such as casually gifting online friends who share common interest and taste inside the open chat or even self-gifting of limited additions to our friends. This new gifting behavior accompanied by robust merchandising lineup is contributing to a solid bottom line growth. We'll make sure Kakao Commerce continues its growth up trend through distinctive relationship-based offerings by delivering business solutions based on expanded relationships between the brands and users.Last year, with the Shopping tab revamp, highly personalized recommendations were made to users and those brands were then added as channel friends. Users received updated news through Talk Channels on a regular basis, which then triggers repurchasing within the Talk platform. Sellers using Talk Channel and Talk Store experienced virtuous cycle inside the platform, spanning from sophisticated CRM marketing to commerce, which worked as a feel behind growing the number of channel stores to approximately 50,000. They are also actively using Kakao Shopping Live to communicate with consumers real-time and the number of live commerce sessions grossing more than KRW 0.1 billion in sales, which doubled compared to last year.Under the platform business, the Portal Biz revenue came in at KRW 85 billion, up 1% Y-o-Y. Since Q4 last year, we started collaboration with advertising partners to try to improve the profitability and also reposition the organization as a content CIC to secure competitiveness through content diversification. We are seeing user metrics improve with adoption of monetization business model for creators for story business and roll out of a short-form pack. And thus, we expect to see improvement in Portal revenue in the second half of the year.Lastly, Others revenue, which includes the mobility and pay was up 24% Y-o-Y and 5% Q-o-Q, coming in at KRW 348 billion. There was a positive top line impact on the back of steady growth coming from the mobility business, including taxi, designated driver and parking. Driven by the cross-border and offline payment growth as well as the top line growth from the securities and insurance business, Kakao Pay also reported the record high quarterly revenue. Content business reported revenue of KRW 1,034 billion in Q1, which was flat Q-o-Q and 33% increase Y-o-Y.Driven by global expansion efforts, Q1 Story revenue came in at KRW 226 billion, down 0.7% Y-o-Y and up 6% Q-o-Q. Domestic market is our key market where we explore and select premium content for the story business. And it works also as an outpost for global expansion, including Japan and North America. Following financial restructuring last year, we made marketing more efficient powered by AI tech, which drove an uptrend in combined GMV versus last quarter. And we are seeing improving revenue and profit metrics underpinned by a robust paying user base. Our plan this year is to bring goods through active realignment of services for North America and the global market.Piccoma sustained healthy growth in Q1, supported by core competitiveness of its content and uptrend in screen adaptations. One of the major contents of Piccoma's Solo Leveling was made into TV animation and there are promotions riding on the trend of screen adaptation of Japanese anime, which helped to improve new user count and user metrics. Japanese M base GMV continues to grow with revenue up 7% Q-o-Q. And despite activated marketing, OP margin showed a big increase Q-o-Q.Music revenue was KRW 468 billion, up 102% Y-o-Y, but down 6% Q-on-Q. Excluding SM consolidation, revenue was up 11% Y-o-Y to KRW 256 billion. In Q1, release of IU's mini-album and her first world tour as well as IU's global performance kicking off in full swing offset the impact of Q-o-Q decline in SM album sales. Many in-house artists are planning to engage in more activities in North America and Japan. And also, we expect to solidify our positioning in the global music market. Media revenue was down 4% Q-o-Q, but up 41% Y-o-Y, reaching KRW 95 billion. High Y-o-Y growth rate is due to the base effect of lower revenue in the first half of last year as new production was mostly lined up in the second half. Large increase in the production lineup from Q4 stayed as such in Q1 as well.Next is the operating expense. Q1 consolidated expense was KRW 1,868 billion, up 2% Q-on-Q and 20% Y-o-Y. Labor cost was KRW 479 billion, increasing 1% Q-o-Q on wage increase and booking of portion bonus expense in line with 2024 annual performance pay plan. On a Y-o-Y basis, there was 7% increase due to SM consolidation. We are maintaining a conservative hiring expense and headcount efficiency and thus, we are to exclude the SM consolidation impact, the labor cost is actually down versus last year.Cost of revenue expense was KRW 820 billion. On reclassification of SM's cost of revenue into labor and outsourcing costs to comply with the Kakao's consolidated accounting basis, there was a one-off base effect, which led to 15% Q-o-Q rise. Due to SM consolidation and higher media and performance revenue from Kakao Entertainment, there was 28% Y-o-Y increase. For your information, cost of revenue against Q1 revenue was 41%. And due to the reclassification of SM's revenue-linked expenses, there was 5.5% Q2 increase. Outsourcing and infrastructure expense was KRW 202 billion, down 21% Q-o-Q due to reclassification of SM account despite the rise in AI-related infrastructure fees and it was 16% Y-o-Y. The marketing expense of KRW 89 billion, down 14% Q-o-Q and 8% Y-o-Y on the back of efficient spending under the cost control of this plan and marketing cost against revenue fell to 4.5%.Depreciation was KRW 198 billion. While depreciation from buildings and servers from running our own IDC center increased, there was 6% Q-o-Q decline on lower PPA amortization following the losses booked for PPA impairment last quarter. However, on rise in depreciation cost for service and others and SM-related PPA amortization, depreciation was up 32% Y-o-Y. In the first quarter, depreciation expenses for new data centers totaled KRW 6 billion. Of this amount depreciation for Ansan data center accounted for KRW 3.5 billion, while the remaining amount pertains to the amortization of usage rights for the Hanam data center, which began operation in March. In the second quarter, the combined depreciation expenses for the Ansan and Hanam data centers are estimated at approximately KRW 10 billion with KRW 3 billion for Ansan and KRW 7 billion for Hanam.Operating profit recorded KRW 120 billion with OP margin at 6%. Stand-alone operating profit for the parent Kakao made up of ads and commerce business came in at KRW 138 billion with OP margin of 21.5%. Next, briefly on non-operating revenue and expense. Due to base effect from large-scale impairment loss and disposition gain in Q4, direct Q-o-Q comparison may not be in order. However, underpinned by strong affiliate performance, including KakaoBank, equity method gain for the quarter was record high since 2022, which drove the Y-o-Y improvement in the non-operating account.Other revenue reported KRW 26 billion with other expenses at KRW 47 billion, about half of which came from the disposition loss from investment in assets and subsidiaries, which are non-recurring factors. Equity method gain was KRW 43 billion, equity method loss was KRW 27 billion, while financial income was flat Y-o-Y at KRW 80 billion and financial expense was up KRW 8 billion to KRW 54 billion on back of higher interest expense, redemption losses from bonds and valuation losses from derivatives.Next is on CapEx. Total CapEx for Q1 was KRW 140 billion, out of which KRW 107 billion was for tangible assets and KRW 34 billion were intangibles. Total CapEx narrowed by KRW 97 billion Q-o-Q on decrease in investment for construction in progress following the completion of Kakao's data center in the fourth quarter. But with a full-fledged operation of #1 data center, we expect increases in investment for machinery, network equipment and service to acquire for AI and cloud services. We are looking into various ways to lessen the financial impact from the rising CapEx and will continue back to you once the details are settled.Now moving on to earnings outlook for the year and the financial plan. This year, we expect to drive a double-digit Y-o-Y growth of consolidated annual revenue on the back of balanced growth platform and content businesses. Also, robust growth from the profitable Talk Biz will continue throughout this year. And we are seeing the signs of profitability improvement from subsidiaries. This bottom line contributions have been constrained to date and so we're looking forward to higher operating margins versus last year.From a strategic perspective, Kakao will still in its growth base, although we will continue to invest in its core projects and also areas such as AI. Our goal is to focus on driving profit through business efficiency enhancement and additional allocation of capital rather than top line expansion built by aggressive investment, all of our decision-making for raising capital strategic investment and shareholder return will be in full consideration of sustaining Kakao's long-term growth trajectory.

[Shina Chung, executive]

This is Shina again. Let me briefly discuss Kakao's overarching future direction. In essence, Kakao Talk is fundamentally about connecting relationship, whether between family, friends, colleagues or even strangers, we share a common interest, Kakao Talk brings together diverse spectrum of users. Over time, these connections have evolved beyond simply exchanging messages to include sharing emojis, gifts, money and more. This quite concerns that the growth has been slowed down post-pandemic, Kakao Talk's domestic MAU increased to 48.7 million in the first quarter, up by 240,000 from the previous quarter, reinforcing the cornerstone of our business.This year, the strategic direction of Kakao is committed to announcing the asset perspective of the Kakao's Talk platform and enhancing its user experience as a messaging tool. To leverage the usage pattern and activity data of over 50 million domestic users will emphasize 2 key objectives; increasing the frequency of user visits by fostering stronger and more diverse connections; and enhancing stickiness of user engagement by expanding the variety of chat rooms and type of interactions available. To encourage more frequent use of Kakao's Talk and help users broaden their social networks we will progressively enhance the social graph and introduce features like multi-profile and multi-account functionalities.Additionally, we will launch new type of chat rooms to accommodate diverse purposes, offering more convenient communication options and potentially uncovering new business opportunities. Furthermore, we will expand the range of all checks exchange within relationship via messages, guests and money transfers to drive growth focused on Kakao Talk core value proposition. Despite rising domestic competition from international e-commerce companies, we believe Kakao can continue to strengthen its possibility through unique relationship and context focused services like gifting, which sets Kakao apart and aligns with the distinct platform ecosystem.Next, I would like to provide an update on Kakao's strategic direction in AI, a [indiscernible] that's drawn significant attention. In late 2022, OpenAI ChatGPT captured public interest prompting the market in early 2023 to evaluate tech companies based on their involvement in large-scale language models. By the second half of 2023, attention to substantial costs associated with developing and maintaining this model. And the market shifted its focus from foundation models to how well companies have monetized their AI.Corporation now face a complex challenge, maintaining technical capabilities in emerging AI while ensuring these investments with their financial structure and produce economic returns. This requires a strategic balance to maximize value and enhance shareholder return in a rapidly evolving AI landscape. Kakao is navigating these same challenges. Investing in AI is a strategic reinvestment of cash flow from our current businesses, aiming at generating long-term shareholder value rather than just paying dividends. However, we recognize that the capital market demands a balanced approach to ensure our investments don't jeopardize our current financial stability or profitability.Even global tech giants, despite significant capital investments, struggle to build a sustainable business model around generative AI. While agility is crucial in a fast-forward, fast-moving AI field, we recognize that our progress with our fundamental model and the launch of commercially viable services has not fully met market expectations. To address this, we have moved barriers between Kakao Brain, which focuses on AI model and Kakao, which focuses on AI services. On May 2, our Board of Directors approved the transfer of AI brands, AI business. This strategy integration allows closer collaboration between our AI research and service teams speeding up a commerce commercialization.Kakao has developed fundamental models from small LLMs to large LLMs and continues to build technical capacity through research. For example, last year, we introduced a small LM tailored to summarizing unread messages. We plan to develop more cost-efficient models with specialized features to meet future AI service needs. Our strategy also includes developing multi-model models for audio, video and images supporting broader service commercialization. To ensure efficient capital allocation, which aligns with market demand, we will integrate external nonproprietary models where appropriate embedding generative AI and our services rather than relying solely on our models.Right now, most generative AI applications are text-based chats, a user experience where Kakao Talk excels. We are preparing services like content subscription and consultations at the unique chat context. We'll also create an AI playground where users can explore and experiment with various AI services and create and share their own AI models. This platform will serve as a testing ground for AI services, allowing us to rapidly integrate successful models into Kakao Talk. Through these initiatives, we are meaningfully expanding on AI ecosystem centered on Kakao.Finally, I want to reaffirm our commitment to shareholder returns and responsible management. To enhance shareholder value, Kakao established a mid- to long-term policy of returning 15% to 30% of its stand-alone cash free flow for 3 years, starting from 2021. We are currently reviewing our shareholder return plan for '24 and beyond to ensure aligned with the government's newly announced guidelines for corporate value programs and meet the market expectations for Kakao. We will provide detailed communication to the market following discussions with the Board of Directors.This year, we will be pivotal in refining our business operation and restoring trust. We intend to shift our previous expansion-centric management strategy and place greater emphasis on essential values of Kakao as previously outlined. Leveraging the robust performance of our core business, particularly through improved advertising and commerce monetization within Kakao's Talk, we will invest in high-growth opportunities. Our goal is to establish a virtuous cycle that sustains [ movie ] boost, profitability across the group, ultimately enhancing our enterprise value. We'll remain dedicated to improving our group governance structure to focus more on our core business.Under the Fair Trade Act, Kakao currently overseas 128 domestic affiliates, a reduction of 19 since May 1, 2023, despite the addition of 25 affiliates from SM Entertainment. Our commitment to government improvement aligns with the expectations of the capital market and our diverse stakeholders and we will continue to prioritize these efforts to ensure effective and transparent management. We are dedicated to improving shareholder value by enhancing transparency and our profit and growth, ensuring Kakao can meet market expectations and growth-oriented company. Furthermore, we will maintain open communication with the capital markets, enable investors to gain deeper insights in our business status and strategic directions. We will listen attentively to constructive suggestions and criticism from the market, guiding us to pursue sustainable long-term growth. We appreciate your continued support as we embark on this renewed journey with Kakao.Thank you. This concludes the overview of first quarter 2024 earnings. We will now move on to the QA session. Please limit your questions to 2 per person due to time constraints.

[Operator]

Now, Q&A session will being. [Operator Instructions] The first question will be provided by Do Hyoung Kim from CLSA.

[Do-hyoung Kim, analyst]

Thank you for taking my question. Before I ask my question, I would like to first congratulate the new incoming CEO, Shina. Congratulations on your new position. Moving on to my question. We see that the GDP growth rate has outperformed the expectation of the market and we are seeing some signs of recovery in both domestic consumption and investment. So, could you provide us with some color as to what the company's take is with regards to the outlook for the overall advertisement market?Second question is if you look at your ad revenue, we've seen a double-digit growth from your Business Messaging as well as Bizboard. What is your strategy and your outlook for these businesses going forward?

[Shina Chung, executive]

This is Shina. I will respond to your first question relating to the overall advertisement cycle and the outlook that we are currently projecting. There is expectation that there will be a bit of a delay in terms of the interest rate cut and the recovery of the overall economic cycle. And we see that the advertisers are continuing to stick to their quite conservative marketing stance. So, with the continuing of the high rate backdrop, we see that there is no particular industry vertical that is leading the advertisement market. And we see that some of the partners are finding it quite difficult to raise funds and hence, that had worked as a constraint on their marketing activities.Now, despite such headwinds, Kakao was able to very quickly and nimbly address the changes that we were seeing in the market and particularly regarding the Chinese e-commerce platforms and their marketing activities and we were able to win the ad budget. And hence, we were able to outperform the industry by posting a quite solid growth. Now for this year, if you look at the online ad market for Korea, about 4% growth is expected versus year 2023. But considering the current global economic cycle as well as all of the geopolitical issues that the world is facing, it's quite difficult for us to time when that economic recovery will take place.But if you look at Kakao, we have our core competitive advantage in Business Messaging. This is something that other online platforms do not have. And last year, we've carried out some revamping of the Talk platform, expanding the business opportunities. And we've also diversified the pool of the advertisers setting in place a solid foundation for us to continue on with the healthy growth. Hence, we expect that for this year, we will be able to outperform the overall online ad market growth.Now also, responding to your second question about Kakao's objective and goal regarding our ad business and what our growth strategies are. Now, there will be 3 aspects that I'll be talking about across 3 different products. First, if you look at Business Message, we are seeing a continuous expansion of a pool of advertisers using Business Message and especially out of that, a number of active advertisers within that pool, making use of our messaging marketing is also up-trending continuously.If you look at the financial verticals and the advertisers, what they need is a template that they could use to safely and in a secure manner, communicate with their customer base by preventing any risks relating to spam or phishing. And so we were able to respond to this advertising need quite well. And hence, we are seeing revenue per advertiser going up. Also for e-commerce, we have provided them with certain templates that they can use to provide more personalized messaging and for them to leverage rich images and videos, which really helped to drive improvement in the overall reach and conversion rate for these advertisers. And hence, as a result, we are seeing a bigger rise in top line revenue compared to the number of messages sent. This year as well underpinned by such high reach as well as conversion rate and all of these positive metrics, we believe that we will be able to satisfy the various different needs of our advertisers and continue on with a solid growth trajectory.Now, moving on to Bizboard, we now see that the Bizboard CPT product in the Friends tab, its top line contribution has been quite significantly risen on a Y-o-Y basis. And what we did was we were able to run performance ads during a specific time slot when there was low demand for CPT product. We were able to maximize this top line potential, which really contributed to a significant growth of the overall Bizboard. This year, we will be providing the Bizboard inventory, the Kakao Talk inventory to the third-party advertiser platform called DSP so that they could make use of the premium inventories that Kakao can offer for the advertisers. As such, we will be able to further develop Bizboard inventory into a high-quality media and also expand the advertisement ecosystem.Now, regarding new businesses, on top of growing the current suite of products that we are currently offering, we are looking into various different strategies to make new business models. So, we will be strengthening the product lineups that better meet the needs of the branding advertisers. And in order to achieve that, what we did was we released a Talk PC impression ad last month. And also within the end of -- before the end of the year, we will launch a full screen branding ad product that could really help to further enhance the appeal of the brand. Our mid- to longer-term approach will be to explore a very specialized and new product that really fit with the overall context of the communication and the ethos of Kakao, which is to expand the relationship base.

[Jeffrey Shin, executive]

Next question, please.

[Operator]

The next question will be presented by Hoyoon Jung from Korea Investment & Securities.

[Hoyoon Jung, analyst]

I have 2 questions. I would like to know as to what impact the Chinese e-commerce players are having on your Talk Biz, either positive or negative? Second question, can you share any specific guidance on your Talk Biz going forward? Any particular, I guess, metrics or numbers that you could share with us?

[Shina Chung, executive]

This is Shina. Responding to your question about what impact the entrance of Ali, Tmall is having on Kakao's overall ad business. Now, when the Chinese e-commerce platforms announced that they will enter into the Korean market, we expected to see a bigger amount of new marketing budget for the online market. And during that period of time, Kakao had really studied and also preemptively responded to the marketing needs that these Chinese e-commerce players would have. And we were able to successfully win the new marketing budget and that had worked as a positive driver behind our Q1 ad growth.Now, regarding the outlook that we are currently looking at, I think it will be helpful to divide that to increase our Talk Biz and the commerce business. So, just first, looking at the ad impact. The entrance of Chinese e-commerce platforms into the Korean market is expected to have positive impact on the online ad market. So, we'll be in line with that trend and very nimbly respond to the needs of the advertisers and we'll continue to win their marketing budget as we go forward. Now having said that, if you look at the case in the United States, when the U.S. -- the Chinese e-commerce platforms entered into the U.S. market, it triggered a sudden change in the overall market environment and there may be some negative impact that the existing pool of advertisers will feel in terms of their top line revenue or their ad spending. So, we are very closely monitoring overall situation regarding the Korea's e-commerce industry.Now, the second part to this answer is on commerce. And as you know, for Kakao Commerce, it is Talk Gift that is really driving the growth as it is underpinned by the relationship that we've mentioned before. And if you look at the special characteristics of Talk Gift, basically, it is all about providing and offering value to the other person. So, its price sensitivity is quite low compared to other groups of products. And also, we have a very specialized product lineup, focusing on global high-end premium products as well. So, we believe that the impact at our commerce business will feel from the entrance of the Chinese e-commerce platforms will be quite limited.Now, relating to the question on Talk Biz annual guidance, as we've communicated at the beginning of the year, our objective has outperformed the market growth. And if you look at our Talk Biz ad business, our objective once again is to achieve growth that is higher than the online ad industry growth rate. And this year, we will continue to focus on expanding the very ethos of Kakao service, which is based upon the business relationship and we will be expanding our advertiser tool and also we'll develop lineup of products that is specialized for a specific context and location.And if you look at commerce, we are expanding its scope from acquaintances and families and friends to even to strangers and we see a very clear growth in terms of the growth of the luxury brand as well as the delivery product. And for Kakao Gift, we've changed the timing of recognizing the revenue to the time of usage. And so depending on the amount of usage for the exchange coupons, there may be some fluctuations in the growth rate of the top line sales.

[Jeffrey Shin, executive]

Next question, please.

[Operator]

The following question will be presented by Jinwoo Kim from CGS International.

[Jinwoo Kim, analyst]

My first question is on what are the plans regarding the proceeds that you get from the EB issuance? Where would that proceed be used? And regarding the remaining shareholders, what will be the use for those -- the shares -- your treasury shares, that is? And then with the incoming of the new management, I see that there's been quite a bit of change in your overall AI business organization. So, what is the investment plan going forward? And also, what is the amount of the losses that you're currently booking from these new initiatives?

[Hye-ryung Choi, executive]

This is Kali. I will respond to your question about EB and our treasury shares. And regarding new initiative, Shina will talk about the outlook and I will talk about the investment plans. Now, as we've made the disclosure in April, because we felt that there was a need for us to have funds for investments so that we can really strengthen our AI capabilities across various different platforms and for us to secure global content and to expand our infrastructure, what we did was based on the underlying of 4.6 million treasury shares, which is about 1% of total outstanding, we've issued a cross-border exchangeable bond, EBs in the amount of USD 200 million.So, this issuance was decided because there was quite a bit of interest rate differential between Korea and U.S. and we believe that we would have been able to -- or the FX rate, excuse me, we could leverage the exchange rate environment and also because the current equity price of the company is considered to be quite undervalued and we were looking forward to an upside in the share price going forward. So, one of the terms and conditions was on 30% of exchange premium. So, a lot of highly reputed long-only investors has shown interest and there was quite a bit of demand. And I can tell you that this was a successful issuance. From the investors or from the underwriters' perspective, because it's difficult with these types of instruments for them to hedge their position because they're short-selling constrained, they eventually would have to bear about 2% additional interest so that they could actually come up with some synthesized or hybrid positioning. So, it was a quite difficult situation. But even despite that, we were able to issue these EBs at 2.65%, which is relatively a low rate and so we've been quite successful.So initially, there were some concerns internally that this may actually be going against the trend of the government-led value up program, which actually seeks to facilitate more share buyback and cancellation. But we believe that this was a necessary financing for us to sustain our growth potential and also to minimize the financial burden as much as possible, at the same time, secure ample amount of investment funds. So, we also ask for your understanding as well. We will also look at the -- whether the share prices are continuously being -- is going to be undervalued and also would look at the increases in the surplus cash flow. So, we can give you a word that we will not shy away from strengthening further enhancing the shareholder value. So, of the KRW 100 billion that is raised through EBs -- excuse me, of the EB funds that was raised about KRW 100 billion will be used for AI content and GPUs and servers. And the remainder will be used for the proceeds for overseas cross-border M&As or setting up of JVs. However, no specifics as of this time has been confirmed. So, as according to the 3-year shareholder return policy, which we announced back in 2021, at the General Shareholders Meeting, we've decided to cancel about 2 million shares, which is about 0.4% of the total outstanding and that cancellation has been completed as of May 3. So, the remaining treasury shares that we hold at this point is [ 3,143 million ] shares.

[Shina Chung, executive]

This is Shina. Responding to your question about our outlook projections regarding new initiatives. So, Kakao Brain's AI business is going to come under going forward and under Kakao Corp.'s separate basis, P&L and of course, the operating expense is going to vary depending on the size of the investment amount. And if you look at the annual losses coming from the new initiatives due to the efforts behind restructuring of Kakao Enterprise, which we did last year, basically, our objective, once again, is to reduce the amount on an absolute basis as much as possible.

[Hye-ryung Choi, executive]

Now, this is Kali. Regarding the size of investment, I think it will be helpful to separate between OpEx and CapEx. First, just looking at OpEx alone, last year, Kakao Brain, on its own spent about KRW 80 billion in AI-related spending. From June up until the end of the year, when the business transfer gets completed, there will be integration of Kakao and Kakao Brain's AI businesses. So, we're expecting around KRW 100 billion of AI-related expense. Kakao Brain, during Q1 booked about KRW 24.5 billion in operating losses. And with the integration of the AI businesses, we expect to see improvement in efficiencies relating to infrastructure cost.Now, moving on to CapEx, we are continuously purchasing GPU servers as we speak. And last year, on a consolidated basis, out of the machinery investment, GPU investment accounted for about 23%, which is about KRW 45.5 billion. This year, we have set aside about KRW 50 billion of investment for that same purpose. Having said that, depending on the level of monetization and the type of business model that is powered by generative AI models, there may be some fluctuations in the size of infrastructure investment.

[Jeffrey Shin, executive]

Due to the time constraint, we will now take the last question.

[Operator]

The last question will be presented by Yeji Yoon from Hi Investment & Securities.

[Yeji Yoon, analyst]

I see that there's been some accounting changes for your mobility and commerce business. What is your operating profit impact from such changes in accounting basis? And second question relates to your mobility business, on top of the changes in the accounting method, I understand that there's been some new fee products or commission products that was introduced for your franchise-based taxis. So, with the change in the fee structure, what impact are you seeing? And also, what are some of the other key products and services that you are at this point thinking of in order to drive mobility business going forward?

[Hye-ryung Choi, executive]

This is Kali. Responding to your first question about change in our accounting basis for booking the top line revenue, we've engaged third-party experts and outside independent bodies and received their advice and recommendations and made some changes in our accounting standard. We've applied a conservative accounting approach on the top line revenue side and have made 2 major changes. The first one being that the revenues coming from the franchise taxi business, mobility and Kakao Makers have been converted to a net basis booking for top line revenue. And for Talk Gift, the timing of booking for the revenue has been changed to the timing of use.Regarding the impact on e-commerce, the change of net basis accounting treatment for Makers has no impact on OP. It's just a changing of the timing of booking for that revenue for Kakao Talk Gift does have an OP impact, but also will have an impact on the growth of the top line revenue. From the revenue side, basically, there's going to be accumulation of unused vouchers that were actually paid for back in 2023, but unused as of yet. And so that's going to really increase the scope of the duration for the usage of these specific vouchers. So, when we say use, that means that usage actually has to take place in order for revenue to be booked, so we would need to think of ways to expand and grow our delivery products and facilitate the use of the vouchers and also to sell more preferred vouchers to the customers to make sure that there are no unneeded deferrals of bookings of the revenue.On the OP side, there could be both positive and negative. In terms of the payment fees and commissions, basically, it actually is hinged on the GMV of the revenue-linked expenses and the timing of such. So basically, if it is a certain quarter where the actual usage volume is higher than the GMV, then the OP can actually go up quite significantly. In terms of the mobility impact, the taxi revenue has been changed on a net revenue basis and that drove down also the outsourcing infrastructure expense down. And hence, there actually is no impact on OP.Regarding your question on Kakao Mobility, we've introduced a new franchise product at a lower fee level of 2.8%. And we will continuously seek ways to thrive together with the overall industry. Regarding the specific benefits and how this product is configured, we are currently also internally going through discussions and ironing out the specifics. So, please do understand that since this product has not yet been rolled out into the market, it will be difficult for us to give you a clearer picture on its impact on top line and bottom line.But I just want to highlight before I end that despite very difficult economic backdrop and economic slump and the slump in the consumption, we were able to expand on the supply, including for a taxi driver for hire and parking business and we've seen an evenly spread out growth across all of these business segments. And we have hence completed the setup of a very firm revenue stream. So this year, we will continue to drive growth and also expand into new platforms to include, for instance, advertisement, the gig economy and car owners platform so that we may be able to sustain the year-over-year growth that we've seen last year.

[Jeffrey Shin, executive]

Well, this brings us to the end of Kakao's earnings presentation as of Q1 of 2024. Thank you very much for joining us.[Statements in English on this transcript were spoken by an interpreter present on the live call.]