Kakao Corp

KRX:035720

Earnings Call Transcript

[Operator]

Good morning. Thank you all for joining today, and now we will begin Kakao's Q2 2023 Earnings Conference Call. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions]

I will now turn it over to Kakao.

[Eleanor Lee, executive]

Hello. I'm Eleanor from Kakao IR. Let's begin the Second Quarter 2023 Earnings Conference Call. Today, I'm joined by Simon Hong, the CEO; and Jae Bae, General Representative of Corporate Investment of Kakao. Please be reminded that the earnings results are consolidated estimates under the K-IFRS basis and are subject to change upon the auditor's review. Also, forward-looking estimates are based on assumptions, so actual results may differ from figures included in today's presentation.

I will now invite Simon to present on business highlights for Kakao, the parent and major business results of the platform business.

[Euntaek Hong, executive]

Good morning, and good afternoon. This is Simon. During the first half of this year, Kakao primarily focused on laying down a robust foundation that will enable long-term growth for Kakao Talk implementing multiple significant projects. The transformation of Kakao Talk is our priority since last year, and is based on the premise that interest connectivity leads to heightened user engagement. As Kakao Talk users create accounts and build relationships through their contact information, the app reflects the realized social interaction. However, one of the limitations we identified, was that without an increase in real world connections, a surge in user activity was challenging.

In Q2, we introduced the Open Chat tab as our third tap, which aims to elevate the community within Kakao Talk. This new feature allows users to expand their network to strangers based on shared interest, thus offering a broader scope of interaction beyond their existing content. Currently, all users view their Open Chat tabs identically, but in the second half of this year, we plan to introduce a personalized curation feature that recommends chat rooms based on user interest. Since its launch, the Open Chat tab has quickly established itself with over 10 million daily active users, achieving its goal of securing double the daily active users than the existing View Tab ahead of schedule.

The Friends tab will evolve to enhance social interactions and to serve as a space where users can discover diverse relationships beyond their real-life circle. In Q3, we plan to reinforce social interaction features by integrating the time out feature into profiles. This feature allows users to share daily content with selected individuals, which disappears after 24 hours. Simultaneously, we are planning to launch the local service, offering benefits and useful information around users' geographical proximity. The Friends tab previously recommended Talk Channel's beyond real-life friends, but with limited discovery potential. Therefore, the local service space will aim to offer small business owners more exposure opportunities, despite significant changes this year.

The Friends tab has grown it's daily active users by 36% from 22 million at the end of last year to 30 million by the end of Q2, and we aim to reach 40 million by year-end through various enhancements.

Kakao Talk now has 3 tabs, each with 10 million-plus DAU, and we witnessed a meaningful increase in user time spent. We intend to continue leveraging this momentum in the latter half of the year to facilitate structural changes.

Looking at the bigger picture, our goal is for Kakao Talk to evolve into a comprehensive communication service, with each of its 5 tabs attracting more than 10 million daily active users.

Moving on to Q2 highlights. In Q2, our consolidated revenue surplus, the KRW 2 trillion mark for the first time, reaching KRW 2.4 trillion on the back of the consolidation of SM Entertainment. This signifies a 17% increase from Q1 and a 12% increase from the same period last year. To clarify, excluding the effect of SM entertainment's inclusion this quarter, we see a 4% increase from Q1 and a slight decrease of 1% from the same period last year, totaling KRW 1.8 trillion.

Starting with Talk Biz, Q2 revenue recorded KRW 530 billion, which is a 2% Q-o-Q decrease, but an 11% Y-o-Y increase. First, on Talk Biz advertising, the Bizboard turned to a plus Y-o-Y growth by achieving a 2% increase, thanks to the expansion of exposure in the Open Chat tab, and increased advertiser demand for CPT products in the Friends tab. As Talk Channel, which showcased excellent reach and conversion rates, solidified its position as the representative product of Kakao Talk. The messaging ad has recorded its highest ever quarterly revenue with 15% -- 50% on year growth. Combined, Talk Biz advertising revenue recorded a 4% on year growth and a 12% Q-o-Q growth.

In the second half of the year, we plan to continue expanding the Talk Biz advertising business by targeting small-to-medium-sized advertisers, creating a foundation for stable revenue generation, and reducing sensitivity to external economic conditions.

For Talk Channel, the total number of active channels increased to 2.04 million in Q2, and we expect the number of partners to expand substantially through external partnerships in the second half of the year. Furthermore, we anticipate a significant expansion in the number of top channels, with more than 1,000 friends in the second half of the year, thanks to the enhanced exposure and usability through the expansion of the Talk Channel display space in Kakao Commerce tab and the Kakao reservation service.

We also anticipate an expansion into local advertising business through the Talk Channel. With the launch of local services in the Friends tab in the second half of the year, users will be able to check the needs of any kinds of local businesses around them. On top of that, as local communities grow well and the Open Chat tab as well, we anticipate a further increase in demand from local partners. We will make efforts to instill the perception that business communication is done through the Talk Channel for our partners.

Moving on Talk Biz Commerce. Kakao Commerce's Q2 total GMV recorded KRW 2.3 trillion, growing 7% on-year. Starting with Talk Gift, a culture of sharing films through this platform has expanded, even during parent's day and teacher's day when offline gifting was traditionally common. The number of buyers in May reached the highest of the year and the GMV grew 7% on year. In particular, premium food and luxury beauty delivered gifts were very popular among users, resulting in a 10% on year GMV increase for all delivered gifts.

In June, we introduced a new online luxury specialty store Luxtab, based on the differentiation of direct sourcing from global luxury brands, Luxtab plans to strengthen the gift lineup that can be shared among closest relationships like family and lovers, by providing limited edition products that can only be purchased from Luxtab.

As new relationship networks are formed within Kakao Talk, Talk Gift is also expected to grow into new areas. While gift has been mainly used for gifting among real-life acquaintances so far, for the second half of the year, we plan to expand our target to non-acquaintances as sharing the same interest and diversify the purchase methods for future growth.

Kakao Commerce has continued its growth with Talk Gift at the center, but we believe that various commerce services other than Talk Gift are now starting to grow. Going forward, by maximizing the synergy between Talk Store, Talk Channel Store and Live Commerce within the shopping tab, we plan to provide users with a more personalized shopping experience.

For sellers, we plan to expand Kakao Commerce exclusive advertising products, which can deliver brand information to 48 million users on Kakao Talk in real time and to solidify our position as a differentiated relationship-based commerce platform.

Next, on Kakao's future growth engines and new initiatives, let me begin with Kakao's AI business strategy led by Kakao Brain. Kakao Brain unveiled the multimodal foundation model, Karlo 2.0 in July and is preparing for the final stages to rebuild a next-gen large-scale language model in the second half of the year. The benchmark tests conducted during the development of the foundation model has confirmed that the technological gap with global models is rapidly narrowing, and we are currently conducting tests internally and in the process of upgrading the model. We believe that for AI to provide additional value to users when combined with real services, and to be a sustainable service, cost efficiency must be thoroughly considered. Therefore, the next-gen large-scale language model is directed toward being an optimal-sized foundation model that achieves a tougher balance between accuracy and cost efficiency.

In addition, we plan to unveil a lightweight language model in the second half of the year, that can be operated more economically and can be applied to different vertical services. In the second half of the year by building foundation models of various parameter sizes, we will continue to attempt to combine various vertical services within Kakao Group with AI to deliver new user experiences.

Kakao Healthcare is pushing ahead to launch full-fledged services in both the B2B and B2C sectors in the second half of the year. Firstly, in the B2B sector, we have launched a clinical data warehouse equipped with further enhanced AI and statistical functions to standardize and accumulate massive clinical visit data within hospitals. The first clinical data warehouse was successfully built at Bundang, Seoul National University Hospital in June, and we are currently deploying the system at several different major hospitals in Korea. We expect various sources of demand, including global research institutes and big pharma companies.

Also in the digital front door business, which is the digital touch point for all medical care services, we plan to launch a service that seamlessly connects the beginning to end of medical care from hospital reservations to recession and promos management for large hospitals using Kakao Talk Chatbots.

Lastly, in the B2C area, we are preparing a blood sugar management service that is more convenient and predictable, connected with a continuous glucose monitor for patients with diabetes or those who need blood sugar management. In June, we signed the final contract with Dexcom, the top company in the U.S. CGM market for global business cooperation. Together with Dexcom, we plan to start launching in the domestic market in Q4 and to actively promote a hyper-personalized digital blood sugar management service in various global regions, including the United States, the Middle East and Japan.

Other than Kakao Healthcare, Kakao is actively supporting the journey to overcome diseases through Rarenotes, a service by Humanscape, that we invested 2 years ago. Rarenotes provides information on rare and intractable diseases to patients. Furthermore, through MommyTalk, the largest pregnancy and parenting community in Korea, Kakao is making efforts to contribute to overcoming the low birth rate challenge faced by our society.

Continuing on to cloud, Kakao Enterprise is restructuring its business structure with a focus on the cloud business, which has high future growth potential and investment value. Through close collaboration with AMD, Kakao Enterprise has accumulated technical competitiveness on par with the level of global CSPs, preparing to target the high-performance premium cloud market. The company's cloud product was most selected by participating companies in the high-performance, computing resource support project run by the government in the first half of the year, thereby improving its competitiveness.

Kakao Enterprise is working to gradually increase its customer base by targeting the public cloud transition projects and the K-Cloud project won by the Ministry of Science and ICT, while accumulating references in various business areas through collaboration within Kakao Group. As it has established a foundation for a new leap forward this year, it expects the financial effects of the business structure reorganization to become visible from next year and to show the substantial growth of the cloud business.

Next, I would like to talk about Kakao's ESG effort in Q2. As part of the Active Green initiative announced last year, Kakao has publicly disclosed the status of Kakao Carbon Index, an environmental contribution indicator developed in-house on our website and is conducting campaigns to promote users' environmental awareness and active participation. Kakao will continue to explore various ways to form a consensus with users for the transition to a low-carbon society and create changes.

In addition, the Kudos for Credos project won by Kakao to support small merchants nationwide and foster coexisting with the local community, we have provided benefits of about KRW 14.2 billion to over 47,000 small business owners through Talk Channel, message, call support until Q2, striving to strengthen digital communication of small businesses. Together with this, through the My Favorite Neighborhood market project, that supports the digital transformation of our traditional markets. 587 stores in 16 traditional markets have opened Kakao talk channels, and we aim to expand support up to 100 markets this year.

In August, we plan to further disclose video content containing the essence of the Kakao ESG report 2022 and the ESG report produced to enhance the accessibility of the visually impaired as part of the barrier-free initiatives. Therefore, we would appreciate your continued interest and encouragement in Kakao's sustainable management endeavors.

[Eleanor Lee, executive]

Next, Jae Bae, General Representative of Corporate Investment of Kakao will brief you on key earnings and business highlights.

[Jae-Hyun Bae, executive]

Hello, this is Jae. I'll begin with the performance highlights for platform and others. Q2 platform and others revenues up by 8% Q-o-Q and 6% Y-o-Y to KRW 396 billion. Mobility revenue was up 11% on quarter and 24% on year, driven by the consolidation of pay and park last July and steady growth of all business segments.

In the Taxi business, despite a gradual recovery in user demand following the fare increase, we have continued to experience sustained growth due to the increasing preference of mobility platform on taxi drivers. Parking, which is a relatively new business, saw good growth from increasing users, as more parking lots interlocked with Kakao T applications. As of Q2, it has become second largest revenue source following taxi-hailing business, contributing to total mobility revenue growth.

In the global market, we've been promoting overseas service in line with the increase in outbound travelers, driving large increase in overseas performance. Kakao Mobility will solidify its position not as simple roaming service, but as an unrivaled global mobility platform underpinned by global network of mobility apps owned by [indiscernible].

Kakao Pay Q2 TPV was up 18% Y-o-Y, reaching KRW 34 trillion. Revenue TPV, which is a revenue contributor, was up 19% Y-o-Y to KRW 10 trillion. By expanding the payment network in favored overseas destinations for domestic users and on enhanced usability of inbound foreign visitors, supported by alliance with Alipay Plus, cross-border payment TPV was 84% Y-o-Y driving the entire payment service group.

For Kakao Pay Securities as strategic investment into Siebert Financial drove cost efficiency. We were able to run different promotions, including lowering fees for stock purchase. This resulted in an increase in trading volume, as well as rise in Kakao Pay money balance, improving user activity metrics, with total trading volume up by 2.7x YTD.

Kakao Pay insurance has been recognized for its achievements in the risky travelers insurance, leaping to the second position. As Kakao Pay Insurance will become a wholly owned subsidiary in August, its business efficiency will improve and is expected to grow driven by product line of expansion to meet the needs of daily life.

Next is on content, and I'll begin with the music business. On SM Entertainment consolidation, Q2 music revenue was up by 107% Q-o-Q and 130% Y-o-Y, reaching KRW 481 billion. On a pro forma basis, the revenue was up 4% Q-o-Q and 15% Y-o-Y to KRW 241 billion. Melon focused on defending its 5 million subscribers and profitability by scaling up content offering in ERM competency. By introducing Spotlight, a service featuring a new album inside Mellon, a variety of content is being delivered to the fan base, while Music Wave is growing into a community service, gathering people with similar taste to get together and communicate within the same music channel.

We are also at the forefront of expanding K-Pop's global influence by providing streaming and download data to billboard. In distribution and label business, IVE's first full length album, which sold 1.6 million copies and (G) I-DLE Mini Album drove growth in revenue and operating profit. We are also seeing synergies start to crystallize between 2 companies as Kakao Entertainment acquired distribution rights for SM artists, starting June 1.

As SM Entertainment completed the setup of an efficient business framework following the restructuring, we anticipate positive results to come through with the debut of a new [ boy band ] rise in September. Concrete talks are ongoing to build a global management system and integration of entities in the United States for the management business. And in the second half, Aespa and IVE will make their debut in North America. As we solidify the basis for business cooperation, combining the platform and know-how of co-entertainment and best of entertainment, we will endeavor to bring business synergies in the near future.

Next is Story and Media business. Story revenue was flat Q-o-Q and Y-o-Y at KRW 231 billion. In time for Piccoma's 7th year anniversary in Japan, we ran multiple events to improve user retention and monetization during the Golden Week and as a result, drove record high GMV revenue. In terms of content, [indiscernible] God of Blackfield and Saving My Sweetheart continued its popularity streak following last quarter, and we saw a sharp rise in revenue from completed Japanese series after joining our platform, through e-commerce traffic and platform operational competency. Going forward, Piccoma will further gain competitiveness through its own studios and the network of publishing outfits, and will scale up content curation technology to offer better content offerings based on user preference. In the process that will go into a platform that users get more often to find what they like out of greater collection.

Also, the business restructuring in North America, that has been ongoing since the end of last year is now complete. Since then, we focused on expanding the library of content, growing the number of titles by twofold and under efficient marketing spend, GMV was up 2Q. In the second half, we'll focus on revamping the Tapas applications as well as increasing the quality and quantity of IPs. For Tapas, UI-UX will get a new base lift uplifting the operational efficiency through global service standardization.

In terms of the content library, we already have novel IPs, not only Korea, but China and U.S. from Radish and Wuxiaworld. And we'll leverage the strength to curate and expand the content offerings from Tapas, enhancing our IP competitiveness in the web novel business.

Next is the media business. Media revenue was up 8% Q-o-Q, driven by the production and promising new IPs, including You Have Done Well slated release on Netflix. But with key titles mostly scheduled for release in the second half, there was 38% decline Y-o-Y with revenue reporting KRW 74 billion. Drama NamNam, which is based on Kakao Webtoon, currently on air and receiving high praise, which goes to show our OSM new strategy supported by original Webtoon Ips, is becoming stronger. In the second half, there will be a release of 10 titles, including the drama, Castaway Diva, The Worst Of Evil and the non-scripted content Zombieverse. While 20 or more dramas and films and entertainment programs will go through the planning and production phase.

With the recent success of K-content, not only in drama, but also in entertainment programs, Kakao Entertainment aims to strengthen its studio capabilities across various genres. By doing so, we will expand our global achievements and continue to thrive in the entertainment industry.

In Q2, game revenue was KRW 269 billion, up 9% Q-o-Q, but down 20% Y-o-Y. In Q2, growth in mobile game revenue and profit, driven by ArcheAge War, and [indiscernible] first anniversary events resulted in Q-o-Q increase. In the second half, we plan to maintain growth through major updates of Odin and ArcheAge War, while anticipating the success of new MMORPG title, Ares. With a combination of established flagship titles and new releases, along with strong global performance, we expect to continue our quarter-by-quarter growth in the latter half of the year.

Next, I will walk through consolidated operating expense and profit. In Q2, consolidated operating expense was up 16% Q-o-Q and 70% Y-o-Y to KRW 1,929 billion, with booking of KRW 230 billion of additional operating expense, including PPA amortization following SM consolidation. On a pro forma basis, due to cost control, the increase was limited to 2% Q-o-Q and 3% Y-o-Y.

Going into detailed expense breakdown, labor cost was up 6% Q-o-Q and 11% Y-o-Y reporting KRW 472 billion due to SM consolidation despite conservative hiring expense across the entire company. Cost of revenue was 22% on quarter and 24% on -- was up 22% on quarter and 24% on year to KRW 810 billion compared to last quarter despite a decline in 1P mix or Kakao Gift and lower marketplace fees and outsourcing costs for the media business on a year-on-year basis. The consolidation of SM Entertainment drove up cost of revenue.

Cost of revenue as a percentage of the total revenue recorded 39.7%, up 1.4 percentage points Q-o-Q. Outsourcing infrastructure expense was up [ 17% ] Q-o-Q and 20% Y-o-Y to KRW 282 billion due to increase in fees linked to the growth of Kakao Mobility Taxi businesses, as well as the higher AI infrastructure fees, on top of SM consolidation. Driven by the marketing activities in Piccoma and Mobility, marketing expense was up 5% Q-on-Q. But on a year-on-year basis, Kakao Entertainment, cost-efficient marketing, lowered the spending 20% Y-o-Y to a total of KRW 120 billion. The marketing expense as a percentage of the total revenue was 5.9%.

With consolidation of SM, there was KRW 23 billion of PPA amortization and on a higher AI-related CapEx, depreciation was up 23% Q-o-Q and 36% Y-o-Y to KRW 186 billion. All in all, Q2 operating profit was KRW 114 billion with OP margin at 5.6%. Operating profit, excluding the impact of SM consolidation was KRW 101 billion. For your information, Kakao's separate basis revenue comprising advertisement and commerce business reported KRW 635 billion in revenue and KRW 117 billion of operating profit with OP margin of 18%.

Next is nonoperating revenue and expense. Other revenue was KRW 17 billion, comprising of disposal gains from equity method shares and other miscellaneous items and other expenses, KRW 28 billion, which includes disposition losses from equity method shares and advisory fees. Equity method gain was KRW 28 billion, decreasing KRW 6 billion in Q2, on lower net profit from Kakao Bank and equity method loss was down KRW 11 billion Q2 to KRW 29 billion on declining losses from the equity method companies.

Financial revenue was KRW 62 billion, mostly from interest and dividend income, which was down KRW 18 billion Q-o-Q due to lower dividends. Financial expense was KRW 51 billion, which are mostly interest expenses and due to the rise in FX translation loss following higher $1 FX rate, it increased by KRW 4 billion 2Q. Q2 corporate income tax was KRW 56 billion accounting for additional tax amount determined by the tax authority, following tax audit of certain subsidiaries, consolidated net profit KRW 56 billion. Lastly, for CapEx on back of AI and data center investments, there was KRW 196 billion of tangible asset investment, including machinery and construction in progress and KRW 42 billion for content and intangible assets, amounting to a total CapEx of KRW 238 billion.

[Eleanor Lee, executive]

This ends the earnings presentation for Q2 2023. We will now begin the Q&A. As we are mindful of the time constraint, I would like to ask that you limit your questions to 2 per person.

[Operator]

[Interpreted] The first question will be provided by Jingu Kim from Kiwoom Securities.

[Jingu Kim, analyst]

[Interpreted] I would like to submit 2 questions. First has to do with your plans regarding internalization of generative AI. I would like to understand as to what your specific execution strategies are for each of the verticals? And when can we actually see AI-powered platform and services? Second question relates to your infrastructure investment costs for AI and data center. Would like to understand as to the size, the extent of the size for this year. And when would you foresee that it will start to normalize. And at that point in time, what would be the amount of infrastructure investment?

[Euntaek Hong, executive]

[Interpreted] Well, thank you. Mr. Kim Jingu for your question. This is Simon. I will respond to your first question, and I will hand it over to Jae in charge of investment to talk about the second question. I would presume that there will be quite a bit of interest in AI-powered services, how Kakao is preparing for that. At this point, we have not yet seen an AI model that is completely equipped with speed, as well as recency and accuracy, as well as the cost efficiency aspect. So we do not yet have that AI model in place, and it is a situation where one hyperscale AI model itself will not be able to solve all the problems that we wish.

I think right now, the way I see the situation is, it's not about who comes out with the hyper AI generative AI model first. I think it's more about finding that optimal and reasonably priced AI model that could be used for many different verticals. And I say most optimal and appropriate AI model, that means from the application side, you would have to go through many verifications and validity tests and fine-tune those applications. So we require innovation on the application side.

You asked about a specific vertical. I think you would have to look at the B2B, B2C domains as well as SaaS and PaaS. Right now, what we are doing is we're testing different sizes of parameters starting from 6 billion, 13 billion, up to 65 billion parameters. In so doing, we wish to develop a cost-efficient AI model.

[Jae-Hyun Bae, executive]

[Interpreted] So I believe one of the most important areas for Kakao would be powering Kakao Talk with AI technology. And basically, Kakao Talk is currently growing into a comprehensive communication platform, underpinned by 3 major pillars of personal communications, social communication and business communication. And I believe that we will be able to see, firstly, synergies come out of business communication pillar.

Up to now, business partners, and you would have experienced this through the Talk channel, the communication mode was one too many. But going forward, we believe that we will be able to provide more personalized messages by using AI technology across many number of users. So we will be able to build out a business communication pillar that is one to one in nature.

So for example, in the areas of ordering, making appointments, counseling and making payments through these transactional services, if we could power that well with AI, that will be beneficial. For instance, in terms of delivery, travel and accommodation, people could make -- when people are making appointments or reservations, we will be able to bring together the meta information that Kakao has and combine that with these non-standardized requests that are being made by the users, and we will be able to fully leverage that data and opportunity to be able to provide competitive services and opportunities to our user base.

So in terms of going forward, our plans, Kakao Brain, I think it will be some time in the second half of the year. I'm not sure at this time, but it will probably after month of October. We will be able to release our foundational model, that strike a good balance between performance and cost efficiency.

This is Jae responding to your question about our infrastructure spending, just to provide you with the background as to what it is comprised of, it comprises of depreciation cost on our GPU server, as well as depreciation and amortization on the leased assets, including the shelf space and other infrastructure-related fees that we pay.

So in the case of infrastructure expense last year, basically -- well, basically, it had posted an increase of about 50% on a year-over-year basis. So this year was the peak, and we expect starting next year, there will be a significant drop in the amount of infrastructure spending. So it will be at that point in time, we will see stabilization of infrastructure spending.

[Operator]

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

[Stanley Yang, analyst]

[Interpreted] I have 2 questions that I would like to ask. If you look at your friends tab, after the change in the profile page, we've seen a significant traffic increase. Would like to get some color on what your monetization strategy is and what your outlook is with respect to this matter? And also because there's a big revenue generation difference between the first half and the second half, I just would like to get some understanding as how quickly we will be able to see that revenue increase from the first half?

Second question, Simon has mentioned that you would take a cost efficiency approach when it comes to AI investment. So would that mean that you will be able to further lower that KRW 130 billion of investment that you've mentioned, which will be an additional investment with regards to the AI? Could you be able to further reduce that or would the timing be next year?

[Euntaek Hong, executive]

[Interpreted] Stanley, I would respond to your first question, and then Jae will tackle the second question. If you look at our Friends tab, it's visited by more than 30 million people on a daily basis. But if you look at the number of advertisements that has been shown through it, the number is extremely low. The lesson that we were able to learn from the chatting tab is that the Bizboard itself was designed such so that we could maximize performance. However, there is a limitation in terms of growing our advertisement revenue, which is just dependent on that surface, and that's the specific slot. As we are evolving our -- the services that we offer, we are, at this point, coming up with various different types of designs that could really help for us to use different advertisement models.

Of course, we will continue to improve on the CPT, and we will continue to expose different advertisement. But if you currently look at the tab, with the list of names in alphabetical order, what we can do is, we can change that into an [ accordion ] type of a menu configuration. And thanks to the consent that we received from our 48 million user base. We know their location information, their geographical information. The data then can be used for us to recommend the most appropriate content to our user base, including, for instance, weather information, traffic and the most nearby convenience store and all the grocery stores. So all the neighborhood stores and shops and information-related to them can be provided to the users of Kakao Talk, especially for stores that sell perishable goods like fresh foods and other poultry, we can be able -- we'll be able to then further facilitate the use of the Kakao Talk channel as well.

So our first stage would be to create that communication channel between the users of Kakao Talk and the vendors and the sellers in that neighborhood based on which we will be able to then create advertisement effect. So we then will be -- so once we reach that level, the traffic from the Friends tab will be able to be further uplifted, and we will be able to use it for advertisement purposes by leveraging the local or the neighborhood information and based upon the relationship that people form with the partners, that reside within that neighborhood, which will then later on bring us a positive advertisement impact, as well as revenue stream from messaging.

Before I let Jae respond to the second question, let me just elaborate as to what I mean by reasonable level of cost. When you look at building out of an AI, there are 2 aspects. One has to do with laying out the infrastructure for training the AI model. Second aspect is, when users actually make use of this AI-powered services, when they're retrieving and when they're making certain prompts and commands into this AI model, there is an infrastructure expense that's going to be incurred. So typically, when users are making use of these AI models, if it's a free services, then that retrieval unit cost has to go below KRW 1 in order for it to be effective. And if it's a paid for a fee service, then even if it's about KRW 10 or KRW 20 on a unit basis, as long as we can -- then we'll be able to recover the cost that is necessary for the use of that infrastructure.

Based on our past experience, when we have the profiles or the editing of the pictures and images powered by AI, we were able to recover that retrieval cost, but that was only for on a temporary basis. So once again, we are developing our AI model under the objective of bringing that unit cost below KRW 1 for free services.

[Jae-Hyun Bae, executive]

[Interpreted] This is Jae responding to your second question. During the first earnings conference call, we mentioned that due to the AI-related investment, our new initiatives, including enterprise and Kakao Brain, the size of the loss could actually increase to about KRW 300 billion on an annual basis. And in the second quarter, Kakao Brain's operating loss due to the build-out of the foundational model and the following infrastructure fee spending on a Q-on-Q basis, we've seen that loss increase. And in the second half of the year, we are also planning on additional hiring of R&D talent for AI. And also, we expect the infrastructure spending to actually go up as we build out the next-generation language model. So compared to the first half of the year, we expect in second half Kakao Brain size of loss will go up.

Now, having said that, Kakao -- the AI training and inference-related computations, which uses the cloud infrastructure of Kakao. Basically, what we are seeking to do is to internalize all that investment within the Kakao group of affiliates so that we can further enhance investment efficiency. And hence, also through some rationalization process at the company, we believe that we will be able to reduce the size of the loss below KRW 300 billion that we've reported in the past. However, in light of the very fast-changing transformation in the AI industry, I have to be a little cautious as to the estimating future predictions, but we will do our utmost to make sure that all the investment requirements that the company has to deal with is within the level that is tolerable in light of Kakao's capabilities.

[Operator]

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

[Seungjoo Ro, analyst]

[Interpreted] I have 2 questions. Previously, you guided that your top business guidance would be a growth of 11%, but I see that in the first half, it was in the early 10%. Would you be able to achieve the target that you previously communicated? And I also remember that when it comes to AI that you will be releasing Kakao's version of KoGPT in the second half of the year. Considering the fact that you want to be rational in spending for AI, should we expect a delay in this time schedule?

[Euntaek Hong, executive]

[Interpreted] This is Simon. I think I will be able to respond to both of your questions, Mr. Ro. Yes, on the first half -- on a cumulative basis, the growth rate was 11%, and we guided that our guidance will be 16% year-over-year growth. We believe that the cost of channel is very robustly growing, although the guidance looks a bit high, we think that we'll be able to achieve that. Hence, we're going to keep to that previous guidance because Bizboard is continuously showing a very high year-over-year growth rate. And so, we expect that as we enter into the second half, the growth rate from the top is going to be higher compared to the first half of the year. So I believe that we should wait and see. But once again, for this quarter, we will continue on with the guidance that we previously shared.

Now for KoGPT, I do not believe that we will be delaying that unless there is any force majeure. We're working very hard on developing these different models, and I think that we'll be able to see them after October. And once again, if I may elaborate, it is not just one AI model that we are developing. We're developing various different sizes of parameters using 6 billion, 13 billion and 25 billion. So different sizes. And one of the services that we are currently envisioning is a message summarizing feature for all the different messages that is within the Kakao Talk. And for this type of a service, we think a more lighter version of an AI model would be more appropriate using about 6 billion parameters. We think that cost-efficient model will work.

[Foreign Language]

[Operator]

[Interpreted] The following question will be presented by Dong Hwan Oh from Samsung Securities.

[Donghwan Oh, analyst]

[Interpreted] I would like to ask 2 questions. It seems like your overall strategic direction for your Friends tab has changed over the years. In the past, it was more about making a time line. And now you're also introducing time out feature. And now you're focusing more on the local business aspect. So does that signal a shift in the direction for your Friends tab going forward?

Second question has to do with open chatting. I would like to ask some questions relating to the traffic metrics and its potential for revenue contribution. And for open chatting, there's some questions related to its potential and how activated this whole service could be because we don't use it as much. And also, there seems to be some limitation in creating a community that is only text-based. So I am wondering whether you have plans to apply or adopt a video base or image base or maybe create a new platform?

[Euntaek Hong, executive]

[Interpreted] This is Simon. Thank you for your question. Responding to both of your questions. If you look at the Friends tab, there's the profile as well. And in terms of the profile updates, right now, what you have to do is, you have to swipe it to be able to see that. But if we change that into a scroll-type of an interface, then that will then translate into a time line. Right now, because the updated profiles are not that many, and it is only exposed to your friends, your usual friends, there's really no need for us at this time to make that into a time line. But if we provide a more disclosure option and have users disclose it to people, even to people that they're not friends with. And if more people are able to see it, then I think then we will be able to bring that concept of time line into it.

And I think we could maybe do that the social communication scene. So I can tell you that it is not a shift in our strategy, but the local business aspect, it's just a natural progression. As Kakao Talk expands its relationship from face-to-face to online to expanding the relationship to people with people that you don't -- you are not acquaintances with. And we call this -- it's a natural progression and natural evolution whereby in terms of -- we call them neighborhood friends in Korean. So it is that aspect of the local business that just very naturally can be conjoined with the Kakao Talk strategy. So I think both of those approaches can coexist.

Answering your second question, open chatting is the same where we are seeing about 12 million visitors during the weekdays and open chatting is growing quite robustly. As I've mentioned, it is one of our 3 key pillars for communication domain, and it defines social communication. Currently, the activity metrics is really good, and there is a very big growth potential from open chatting. You've mentioned that open chatting is only tech space that there will be some limitations. But actually, there are various different types of content that is being used within that space. One of the open chatting that I'm subscribing to is a vocal training-related open chat where people actually record their singing and they upload the file and other people would listen to it and give feedback. So you are able to share such voice, as well as other short-form videos in this open chatting space.

So in terms of whether we will be making a separate platform for -- to support short forms, I've mentioned in my presentation that we introduced [ Pong ], which is a feature whereby you put up a content, and it will disappear in 24 hours. I think what we need to do for the time being is to monitor how this product is being used and then later on, make a decision as to whether we will make an exclusive platform for short forms.

Just a little more elaboration on open chatting as you may not yet have found an open chatting room that really suits your interest. Right now, we're only featuring basically what we are featuring. But starting the second half, we will be able to make recommendations based on the interest of that specific individual. So I think when that time comes, you will be able to find the chatroom that best fits your interest.

And also, there are so many different segmented and very specific topics and themes that people would look for and subscribe to, and the data that we can gain out of this is extremely valuable for people who's interested in cooking or watching movies and films, that information is going to be very valuable, and we will make use of the data to be able to recommend certain content and other open chat rooms and even use that for optimizing our advertisement.

From a longer-term perspective, because running a chatroom does require a significant level of efforts of the operators of these chatrooms, we will think about how we could incentivize them. We would be experimenting with different subscription models or even sharing of ad revenue. And this type of a chatting room is also very helpful for running specific events. So I'd say that this open chatting is like a vessel. Its possibilities is quite limitless. You can actually put anything into that vessel. And we are only beginning with open chatting and we expect and we are seeing that currently because there's also Bizboard and other advertising services, the performance -- there will be quite a bit of contribution to overall Kakao's performance.

[Operator]

[Interpreted] The last question will be presented by Ha Jeong Kim from DAOL Investment & Securities.

[Ha Jeong Kim, analyst]

[Interpreted] My first question relates to your AI investment. I would like to understand as to the amount of difference that you are seeing in developing your own computational models, your AI models versus taking what is already out there and fine-tuning it for your purposes. Of course, there are different AI models, the large-scale language models. But since you've introduced a Karlo 2.0, we'd just like to confine my question to Karlo 2.0. Would like to get a feel as to what the amount of investment difference is when you're internally developing it and when you are making use of what is already existing out there?

Second question is on strategic synergies that you may be able to gain from SM consolidation. First is on the IPs. Can we look forward to a synergistic impact between the SM and Kakao Entertainment IPs or the artists that it has? Second is, since you've also set up an entity -- a combined entity in North America, we look forward to their role in discovering IPs and discovering talent as well. If you could share your views for North America market, as well as ex North America?

[Euntaek Hong, executive]

[Interpreted] This is Simon. Thank you for your question. Responding to your first question on AI, investment or the cost. When it comes to AI model, it's a little bit anti-intuitive, meaning if the model becomes bigger in size, the cost and the response time actually all increases. And also there is a Korean language element, compared to global models, basically, Korean model requires more number of tokens. That's why people say that the response time that they would get when using English is much shorter compared to when people use Korean as their language. And that is why we need optimized Korean language models. And that is why we think that the lighter weight AI model will better suit that requirement.

Meta recently had released Llama, which has 70 billion parameters. And they open-sourced it. So I think going forward, a lot of companies will start to fine-tune Llama and we'll do many things with it. And, of course, Korean language localization will also be attempted. We are not excluding any possibility of using other companies model. It is just that AI service, if you look at how the market is forming, it's very much like that of the cloud market, meaning one company is not going to be a dominant player in the space of AI, just like you see in the cloud market, there are multiple number of cloud providers and cloud players in that market.

And the reason is because for us to use a global cloud services is extremely expensive compared to what Kakao uses, our Kakao internal cloud versus subscribing to an overseas global cloud provider, there is a twofold cost difference. And the reason is because there's a lot of features that needs to be developed in order to meet the requirements and the needs of the clients of that cloud service. So that is why we need our own cloud, and I think same will apply for AI as well. So it will not be appropriate for me to give you a specific cost difference between our -- using our own AI motors using that of the outside. But through our experience of having this profile event, whereby we used Karlo 2.0, we were able to verify that there will be cost gains from this.

[Jae-Hyun Bae, executive]

[Interpreted] So this is Jae. Responding to your question about synergies with SM Entertainment. We previously communicated that the 3 companies, including Kakao, Kakao Entertainment and SM Entertainment will cooperate in areas such as: number one, strengthening the core infrastructure of the music business; number 2, diversifying into the secondary IT business, including the future industries of AI and virtual human; and 3, cooperating across the platform that really cuts across the music ecosystem; and 4, expanding K-Pop to the global stage. And in early July, SM Entertainment set up a professional and specialized publishing subsidiary entity -- is setting up a publishing structure that is supported by multi-label strategy. Going forward, we will be able to really leverage opportunities of synergies having different composers and lyric writers or collaborate with one another. And also, we are looking at different ways for us to collaborate and cooperate in nurturing the future next-generation artists as well and also cooperating in the existing IPs as well.

On the global side, we've set up that global entity so that we could secure efficient local distribution channel. And by expanding partnerships with overseas labels, our domestic artists will be able to go global. And in that process, we'll be able to provide them with efficient support. And we think that in terms of planning and production with these large global artist, studios, we think that we will be able to have ample competitiveness, and we are looking for good opportunities.

And also in regards to the future businesses and initiatives of AI and virtual human, we would be also able to apply the foundation model that had been developed by Kakao. And we now are able to make investments in scale -- with scale. And regarding the platform business, already SM Entertainment, JYP and Kakao in collaboration are working together to grow [ DOU ] into a global fandom platform. So at this point, we are coming up with different action plans.

Now, for -- in terms of Japan, basically, what we've done was that we have been very successfully run the survival program, and we are able to really exert our efforts to build out a platform for nurturing K-Pop artists and also to build out a system on the global stage for nurturing new artists. And also for new artists, basically, gaining local artists and exploring them has become an important aspect. And for -- we have taken entity, the unit group in order to launch them in Japan as NCT Tokyo. We have, through, YouTube, been airing the survival program, NCT Universe, and that had been well received.

[Euntaek Hong, executive]

[Interpreted] Before we end, I just want to respond to one of the questions that we received before we started the earnings call. We mentioned that we -- our DAU was up. And so, there was a question relating to actually the time spent. Because some of the survey data showed that the time spent has dipped. But if you look at our figure compared to June of '22, there has been a 6% increase in the total time spent by the users. And this is happening despite the fact that we are now moving from pandemic to endemic, basically, people are spending less time online on the back of that and also Kakao-specific event of system failure. Despite all of that, we are seeing the usage and the time spent by the users on Kakao Talk actually going up by 6%.

[Eleanor Lee, executive]

[Interpreted] Well, this brings us to the end of the second quarter 2023 earnings conference call for Kakao. Thank you very much, everyone, for joining us.

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