Kakao Corp

KRX:035720

Earnings Call Transcript

[Operator]

Good morning, and good evening. Thank you all for joining today. We will now begin Kakao's Q2 2024 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.

[Unknown Executive]

Hello. I'm [ Jeffrey ] from Kakao IR. Let's begin with the Second Quarter 2024 Earnings Conference Call. Today, I am joined by Shina Chung, the CEO; and [ Jayden Shin ], the CFO.

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. CEO Shina will first explain Kakao's mid- to long-term growth strategy, followed by CFO Jayden, who will discuss the key business achievements for the second quarter.

[Shina Chung, executive]

Hello. This is Shina, CEO of Kakao Corp. First of all, I understand the prevailing concerns of shareholders regarding recent challenging circumstances surrounding Kakao Corp. It is a difficult situation, particularly as all employees of Kakao Corp are diligently focused on business reforms and AI innovation. Despite the challenging circumstances, the management team and all employees of Kakao Group, including myself, will work together to ensure that all services led by Kakao and its key affiliates continue to operate smoothly and hold up to their core values and responsibility.

As the CEO of Kakao, I am committed to fostering joint growth with our various stakeholders while focusing on the core aspects of our business. We will strive to solidify our foundation for sustainable long-term growth.

First, I would like to briefly explain Kakao's consolidated financial results for Q2. Kakao's Q2 consolidated revenue was KRW 2.005 trillion, representing a 4% growth on year. Operating profit was KRW 134 billion, marking a 19%-on-year growth. At Kakao parent, despite an unfavorable macroeconomic environment, the business messaging and advertising and gifting and commerce, which are unique business models only implementable on KakaoTalk continued their growth trajectory. This has once again demonstrated the robust fundamentals of our top bid. Among our major affiliates, the positive impact of the financial restructuring incurred last year was evident in Kakao Entertainment and Kakao Enterprise as their contribution to profit improved. However, it is somewhat disappointing that the overall profit contribution from affiliates was particularly offset by the impact of the gap in new game release in Kakao Games and the strategic marketing expansion of Piccoma in response to intensified competition, the Japanese webtoon market.

Next, I would like to briefly discuss Kakao's long-term growth strategy. Currently, Kakao and its affiliates are working on clearly defining their respective core businesses. Moving forward, we intend to drive growth by focusing on the essence of these core businesses. For Kakao we have defined the core elements for future growth at KakaoTalk and AI. Starting in the second half, we will allocate company-wide resources to accelerate growth of Talk Biz and focus on new innovation through AI.

First, as the core aspect of Kakao's future growth, we plan to expand and explore new mid- to long-term growth drivers in KakaoTalk's advertising and commerce. Additionally, Kakao's aims to establish a third revenue base for Kakao Talk Biz overall, following advertising and commerce. First, Kakao's advertising business will leverage its competitive advantage, a nationwide reach and relationship service to launch differentiated branding display ad products in the second half of the year. Additionally, new business opportunities will be explored through the expansion of business relationships within KakaoTalk. Kakao's Bizboard, a unique product that delivers business messages alongside Kakao's Mega Traffic stands out as a key offering that cannot be replicated by other platforms. However, it has been challenging to cater to advertisers with branding needs who prefer larger screens and highly visible formats. The demand from advertisers seeking [indiscernible] brand awareness using KakaoTalk Mega Traffic has been steadily increasing. It is estimated that approximately 40% of mobile advertising budgets are allocated to fulfilling this branding need. In response, new branding display ad products will be introduced in the second half of the year to meet these advertisers' demand. The plan includes launching full screen ad products that utilize the updated profile area in the friends tab and dedicated press paces in open chatting tab, allowing brands to effectively deliver high-impact messages. As these new products can provide advertisers with significant value in terms of raising brand awareness and creating a sense of trendiness, it is expected that budgets from advertisers with branding purpose can be effectively secured.

In addition, we are planning to explore new monetization opportunities through the expansion of business relationship within KakaoTalk. It has been observed that many professionals and small business owners publicly share their KakaoTalk IDs through social media or blogs, indicating a strong desire to engage in business communication with customers within the platform. To address that, a new [ stream ] will be created where micro-influencers and small business owners can set up business profiles, making it easier for this profile to be discovered within KakaoTalk.

Currently, Kakao's advertising business is primarily centered around display ads and message ads are getting corporate demand. As a well-structured context for users to start for various business profiles within KakaoTalk is established, it is anticipated that revenue from service targeting demand from individuals such as freelancers or microinfluencers who are less sensitive to economic fluctuation compared to corporation could become a new pillar of growth in the advertising sector.

Continuing with Kakao's commerce business, the plan is to expand the context of gifting while also discovering new growth drivers outside the gift market through personalized discovery commerce. Talk Gifts service has grown its revenue and transaction volume by strengthening its product lineup, which started with vouchers and expanded to delivery products and premium brand items. To accelerate the growth of the Talk Gift service once again, it is essential to broaden the context where [indiscernible] gifts are exchanged on the platform. Currently, the majority of transaction volume is concentrated around birthdays. Instead of focusing only on birthdays, Kakao plans to expand gift exchanges for various events and situation.

In addition to existing purpose-driven commerce context of Talk Gift, we plan to explore additional growth opportunities in the discovery e-commerce market. Currently, this covered commerce is actively conducted within KakaoTalk through the shopping [indiscernible] and Talk channel. Starting in the second half of the year, we aim to enhance the shopping tab by expanding personalized shopping creation areas. Moreover, there are plans to further refine personalized message marketing for the shopping and shopping live talk channels.

First, with the updated shopping tab last year, users are provided with personalized shopping creations by gathering recommended products and promotional items from brands they added as trends in one place. This has led to a positive impact of connecting product discovery to purchases. Therefore, this year, we plan to further enhance search and recommendation technologies based on purchase history to offer a more personalized commerce experience within the shopping tab. Additionally, to increase the proportion of commerce transactions converted through shopping and shopping live talk channel messages, we plan to enhance targeting messages. Previously sustained top deal products and promotional messages were sent to all talk channel friends. Going forward, we will use commerce data within KakaoTalk to deliver personalized shopping benefits and deals tailored to users' purchase histories and preferences. This will expand the theme where real-time discovery leads to purchases.

Ultimately, based on the steady growth and the purpose-driven commerce of gift purchases where Kakao holds a competitive advantage, we aim to expand our market share in the e-commerce sector by seeking new growth drivers through a hyper personalized shopping curation in the discovery commerce space. From a mid to long-term perspective, Kakao plans to enhance user engagement on KakaoTalk by offering chat features tailored to users' specific conversation purposes while exploring new business opportunity beyond existing advertising and commerce aligned with the essence and context of the platform.

In the early stages of KakaoTalk's service, most conversation were for everyday tax with acquaintances. But recently, the purpose for using the platform has become increasingly diverse, including [indiscernible] communities activities and real-time communication channels with small business owners with their customers. A useful chat feature tailored to these various purposes are introduced, user engagement indicators such as the number of active chat rooms and the volume sent and received messages are expected to grow continuously. For example, we are considering chat features that go beyond everyday conversation such as marketing tools for small business owners to announce events to customers through open chat or conference functions for conducting large-scale lectures. If these such features prove to be significant business utility, there is potential to explore monetization opportunities through a subscription model for providing certain additional features. Currently, Talk Biz subscription-based services, including emoticon [indiscernible] and [ talk draw plus ] have already secured 4 million monthly subscribers. Although the absolute revenue from these services is smaller compared to advertising or commerce, we have shown significant growth potential due to their low sensitivity to economic fluctuations despite the recent downturn in domestic economy.

Moving forward, there are plans to explore various new subscription-based revenue stream aiming to establish a steady revenue base within Talk Biz that is less affected by economic cycles.

Moving on to Kakao's future growth engines, AI. First of all, Kakao Corp established 2 new organizations related to AI, Kanana X responsible for AI service development and Kanana Alpha, which supports service development by providing the appropriate language model. Led by Kanana X and Alpha, Kakao Group will launch a cost-efficient AI service that is easily accessible to users and will actively explore monetization opportunities through AI innovation rather than focusing on developing proprietary LLM. In the second half of the year, Kakao is preparing to introduce its first B2B AI service in the form of chat platform where at Kakao can show its distinctive competitiveness and it's most capable of. The service will integrate AI with Kakao's core strength and relationship-based communication, providing a distinctive offering that only Kakao can deliver. Since KakaoTalk has more than 48 million users, including users who are not yet familiar with AI to minimize AI hallucination impact and quickly respond to market reaction, the AI service will be launched as a separate application rather than being integrated in KakaoTalk. Within the second half of this year, we will have the opportunity to showcase some of these features to users and market participants in more detail.

Additionally, we plan to test and refine the quality of the service through a closed beta test in the second half of the year and to speed with the official launch of the service. As mentioned earlier, AI is a crucial component of Kakao's long-term growth strategy. Despite the event of AI, some things remain constant, best and the core of Kakao are rooted in relationship and communication in that Kakao excels creating user-friendly service. This B2C AI service is just beginning. Kakao will pursue active innovation through AI with agility and make AI [indiscernible] growth driver for the group.

Lastly, on the challenging circumstances, as CEO I see it as my duty to enhance shareholder value by firmly establishing a foundation for Kakao's growth. In the second half, along with employees of Kakao Corp., we will work diligently to implement our planned strategy, laying the groundwork for long-term growth.

Next, CFO, [ Jayden ], will go over the key financial highlights.

[Unknown Executive]

Good morning. I'm Jayden Seth of Kakao Corp. Since this is the first time I'm addressing the capital market, I will begin by sharing why I as Kakao's CFO see as an important direction in terms of our financial strategy, and then we'll run through the results of the second quarter.

First, the most important mission in my mind is efficient resource allocation across the organization. Through the lens of having a selective focus we will allocate resources efficiently behind driving innovation around KakaoTalk's Talk Biz and AI to power mid- to longer-term growth of the company. This will accompany rigorous monitoring, ensuring that we are keeping a good balance between growth and stability to make sure that Kakao's current financial soundness is intact.

Second, we'll further boost cost efficiency by actively identifying opportunities for efficient spending through a focused approach and priorities we'll push forward with implementation measures expeditiously. The focus will not be on short-term cost savings, but on building a sound cost structure from a longer-term perspective. We'll come back to the market to communicate details of the cost efficiency plan and its financial impact at the most opportune time.

Lastly, as a CFO, I'll place greatest focus on ROI and ROE and will closely monitor these profitability indicators. I will perform my responsibilities as a CFO and not fall short of the expectation of the market by making sure that business priorities are set in an efficient manner based on such profit metrics.

With this said, I will now move on to the financial results of a Kakao Corp and its major affiliates for Q2. Consolidated revenue was KRW 2.005 trillion, up 1% Y-o-Y and 4% Q-Q. Platform revenue was KRW 955 billion [indiscernible] Q-o-Q and up 10% Y-o-Y.

We'll provide a bit more color on Talk Biz, Kakao's main business and its Q2 performance. Talk Biz revenue was KRW 514 billion, up 7% Y-o-Y, but down 2% Q-o-Q on the back of seasonality in the commerce business. Out of Talk Biz, ad revenue was KRW 307 billion, up 9% Y-o-Y and 10% Q-o-Q. Following the previous quarter trend, the business messaging posted 16% Y-o-Y growth, driving the total ad market growth underpinned by its competitive advantage. Business messaging in Q2 achieved record high quarterly revenue. And at the same time, number of active talk channel advertisers and total number of talk channel brands both reported 11% Y-o-Y growth, laying the foundation for sustained growth over mid- to longer-term horizon. Also, as advertisers consider ad efficiency more important, there is greater use of premium templates, which is used to spend our personalized custom images and videos to customers rather than just sending the same message to every talk channel friends. This actually drove sizable revenue growth versus the number of messages sent through the talk channel, and we expect this trend will sustain a double-digit growth for business messaging in the second half of the year.

Next Kakao Talk display ad revenue, which includes Bizboard and other DA revenue reported a 5% Y-o-Y growth. Bizboard is KakaoTalk's flagship DA product and despite sluggish domestic demand laying down on economic recovery, there was greater revenue contribution coming from the friends tab ad inventory, thus ending with Y-o-Y revenue growth of 2%. Other display ads, which includes Bizboard -- which excludes Bizboard, reported 26% Y-o-Y growth driven by chatting list ad, which was released together with the open chat tab last year. Although the share of other display ad is not significant, we are seeing a high rate of growth. And once the revenue from the new DA product, which was slated for release before the end of the year comes through, we expect to see meaningful expansion of the share of other display ads within the top DA.

Next Q2 total Kakao commerce GMV was up 6% Y-o-Y reporting KRW 2.4 trillion with revenue coming in at KRW 207 billion, up 5% Y-o-Y, but down by 15% Q-on-Q on seasonality. Seasonal event for gifting giving fell bow on the national holiday this quarter, contributing less to GMV. But with an expanded premium lineup and platform differentiation, luxury brand GMV increased by 12% Y-o-Y, driving GMV for Talk Gift up by 5% Y-o-Y. For Talk store, Q2 GMV was negative on back of lowest pricing policy and aggressive marketing by Chinese e-commerce platforms, which had an adverse impact on household, clothing and consumer electronic categories. As we move into the second half to minimize the impact. We plan on offering both high quality and competitive pricing through our brand stores and run Talk deals for popular food and beauty brands, which Talk store is good at.

From the platform business, the portal revenue was down 2% Y-o-Y, but up 4% Q-on-Q, reporting KRW 88 billion. Portal Biz is focusing on solid buying, the basis for rebounds by winning the big advertisers, including e-commerce and through stronger search ad partnerships. In the second half, we'll defend our bottom line through SA optimization in line with our effort to drive gradual improvement in performance. Lastly, platform and others revenue, which includes mobility and pay, was up 18% Y-o-Y and 2% Q-o-Q to KRW 354 billion.

On increasing outdoor activities, there was a rise in demand for taxis, driver for hire and parking and in particular a pronounced increase in the use of big parking lots, which led to 18% Y-o-Y growth in parking revenue. For Kakao Pay, there was double-digit Y-o-Y growth across all of its business domains, including payment, financial services, which for the first time drove a turnaround in quarterly EBITDA. Next, Q2 revenue for content, which is another pillar of Kakao's business came in at KRW 1.050 trillion flat Y-o-Y and up 2% Q-o-Q.

First, story revenue for Q2 was KRW 216 billion, down 7% Y-o-Y and 5% Q-o-Q. For the domestic market, we are using AI technology to enhance efficiency in marketing. As a result, platform revenue increased versus last year, while user metrics trended upwards, yet again solidifying the user base. In North America, to facilitate the new user inflow and user lock-ins, we strengthened the IP library for [indiscernible] build up a lineup of good titles across a variety of genre. We have selected sources, good IP and are also talking to Piccoma about content distribution strategies so as to build an IP pipeline that will ensure growth for us and also for the creators together. Piccoma also ran active promotions in time for the peak season of [indiscernible]. Fueled by such users' plan activations, first half cumulative GMV surpass JPY 50 billion, once again following the Q1 trend and have proven strong competitiveness as the platform by ranking on top in terms of consumer spend out of all the apps in Japanese market, including Games. Music revenue increased 6% Y-o-Y and 9% Q-o-Q to KRW 511 billion. In Q2, new albums of IVE, RIIZE and aespa grossed in 1.7 million, 1.3 million and 1.2 million record sales respectively, driving revenue and profit growth. Also, the [ now studio artists ] are going on global tours and selling our tickets across cities around the world.

Lastly, media revenue was up 22% on year, but down 6% on quarter to KRW 90 billion. The reason why we see high Y-o-Y growth is due to the base effect from the production pipeline, which was concentrated in the second half of last year.

Next is on operating expense. Q2 consolidated operating expense was KRW 1.871 trillion by Q-o-Q and up 3% Y-o-Y. Labor cost was KRW 481 billion [indiscernible] Q-o-Q on conservative hiring and up 2% Y-o-Y due to the impact of wage increase. Revenue-linked expense was KRW 797 billion, down 3% Q-o-Q due to a lower 1P revenue for Talk Gift and declining Kakao Enterprise cloud service-related costs. Compared to last year due to higher Talk Gift revenue from direct sourcing and on higher revenue from performances and screen [indiscernible] of Kakao Entertainment, which drove higher cost base, revenue-linked expense increased 2% Y-o-Y.

Please also note that the percentage of revenue-linked expense against Q2 revenue was 40%, which is down by 1.5 percentage point in Q-o-Q. Outsourcing and infrastructure expense was KRW 196 billion, down 3% Q-o-Q and 5% Y-o-Y on back of temporary decline in infrastructure fee expense due to the transfer of AI business divisions of Kakao Brain. Marketing expense was KRW 108 billion, increasing 21% Q-o-Q and 8% Y-o-Y due to salient increase from content marketing on back of e-commerce strategic marketing spends deployed to [indiscernible] competition in the Japanese market.

Share of marketing expense against Q2 revenue was 5.4%, up by 0.9 percentage points Q-o-Q. Depreciation and amortization was KRW 207 billion, up by 5% Q-on-Q and 8% Y-o-Y on ramp-up of Kakao's data center operations, new data center releases and bigger investment into GPUs, servers and AI equipment. All in all, Q2 consolidated operating profit was KRW 134 billion, with OP margin up 0.8 percentage point Y-o-Y, reaching 6.7%. Please also note that on parent basis, Kakao Corp's Q2 operating profit was KRW 130 billion, with OP margin at 20.2%.

Next, I will briefly run through nonoperating revenue and expense line items. Other revenue was up KRW 38 billion Q-o-Q to KRW 64 billion, while other expense increased KRW 19 billion Q-o-Q to KRW 65 billion on back of gains and losses from the sale of equity method shares.

Financial revenue was flat Q-o-Q at KRW 79 billion, and financial expense was KRW 75 billion on back of expense recognition related to noncontrolling shares following disposition of assets invested under Kakao Ventures fund. While Kakao Bank reported sound net profits, some of the investor entities turned to loss-making, driving equity-method gain down KRW 4.6 billion Q-o-Q to KRW 39 billion. Equity-method loss narrowed KRW 16 billion Q-o-Q and recording KRW 11 billion due to the overall performance improvement of the companies under the equity method.

Next is on CapEx. Total CapEx for Q2 was JPY 170 billion with KRW 140 billion investment for tangible asset and KRW 31 billion investment for intangibles. Total CapEx was up JPY 30 billion Q-o-Q due to the continuing impact from acquisition of equipment, machinery, including network, equipment servers and GPUs. But compared to last year, due to the base effect of the data center investment, which was completed in Q4 of 2023, there was a decline of KRW 68 billion.

Equity-method losses decreased from KRW 16 billion to KRW 11 billion quarter-over-quarter, thanks to improved financial performance of the equity-method company. Most of the [indiscernible] marked investment has been implemented as equipment needed for initial operation of the #1 data center, which was the main reason behind the rising CapEx is largely completed. Depending on the spend of AI business going forward, there may be an impact on total CapEx, but we project this year's CapEx to be lower than that of last year.

Last but not least, a brief update on the shareholder return policy. We are currently looking into ways to enhance the longer-term shareholder value through well-balanced capital allocation between shareholder return and investment which is crucial for further growth. We'll go through the BOD approval as swiftly as possible and come back to you to communicate Kakao shareholders' return policy and wait to enhance the shareholder value in the near future.

[Operator]

[Operator Instructions] The first question will be provided by Jae-min Ahn from NH Investment & Securities.

[Jae-min Ahn, analyst]

I'm Ahn, Jae-min from NH Investment & Securities. I just have one question. We've recently seen some news articles on potential sale of Kakao's subsidiaries and your noncore businesses and your efforts behind improving your corporate governance. Could you provide some color with regards to this topic?

[Shina Chung, executive]

Yes, hello. This is Shina. I will respond to your first question. As I've mentioned at the opening presentation, not just Kakao Corp., the parent, but all of our subsidiaries are at this point clearly in the process of defining what our business core and Ethos is. And for Kakao Corp., the parent, we've defined our core as KakaoTalk and driving innovation powered by AI. Therefore, going forward, we will be funelling all of the corporate resources behind the growth of the top biz, refueling the growth that is and finding new growth engines powered by AI in order for us to secure a firm basis for long-term growth. So therefore, we were defined as noncore businesses, any business areas that will lack relevance to our KakaoTalk platform and the strength that it accompanies as well as the big AI mega trend. Therefore, in the second half of the year, we will move quite expeditiously in implementing the efficiency plan. So at this point, since we are still in the process of ironing out the specifics and details, it will be difficult for me to share with you all of the details, but we will come back to you once we have the information ready.

[Operator]

The following question will be presented by Yeji Yoon from IM Securities.

[Yeji Yoon, analyst]

I am Yoon, Yeji from IM Securities. My first question is on your third quarter performance outlook. Also, if you could include the performance that you're seeing up to date as of July, that is, regarding your advertisement and your commerce business. That would also be quite helpful. And I see that the size of the losses that you are currently incurring from your new initiatives are going down? Would that also be the trend for the second half of the year? And also after the merger with Kakao Brain and its AI business, I would like to understand as to the impact on the AI development cost.

[Unknown Executive]

Yes. Responding to your question about the third quarter outlook, if we first take a look at the Talk Biz, the advertisement market is going into a slow season in the third quarter. So there will obviously be some impact on our Talk Biz numbers. But if you look at our business messaging and Talk Gift, we are seeing a very solid growth being sustained. And for platform and others, robust growth from Kakao Pay is continuing. But on the other side, for our Kakao Mobility business, since we've just launched the new taxi franchise product, it's at this point quite hard to have visibility in terms of the third quarter outlook because of the uncertainties. Now in terms of our content business, if you look at Kakao Entertainment's music business, particularly the artist activities and album release, most of these activities were concentrated in the first half as opposed to the second half of the year. And for the media business, depending on the timing of the release for the lineup of titles that we have, the timing for the recognition of the revenue is also going to vary. Now having said that, we went through a rationalization of it and hence, we were able to improve the profit structure of Kakao Entertainment. It's become more healthier, and we are looking forward to greater profit contribution going forward. For Kakao Games, however, we think that the impact of lack of new game title release is going to continue on into the third quarter. On the cost side, regarding the labor cost, we will continue to have a conservative head count stance going forward. So there's not going to be big of a fluctuation or change in terms of the labor cost line item. On the marketing spend side, including the story and the content, it's going to be more or less quite flat on a Q-over-Q basis. But because of the preparations that we are putting in for the launch of the B2C AI and the build-out and the use of Kakao's own data centers, depreciation and infrastructure-related fees could start to inch up. So in the second half of the year, the overall spend level may slightly edge up. Now moving on to the question on the new initiatives, if you look at Kakao Enterprise, there's been a number of new initiatives under the umbrella. And we are now seeing the improvement or the positive impact from the realignment and the enhancement of the financial structure of Kakao Enterprise. Because of that, we think that as we go into the second half of the year, we will be able to see sizable improvement in terms of the operating loss of the company. And with the coming of the age of artificial intelligence, cloud is going to become ever more important. So from a longer-term perspective, if within Kakao Enterprise, if we are able to scale up the level of our cloud capabilities up to the level of the global cloud service providers and if we are able to migrate our group affiliates into using Kakao's cloud, we believe that we will be able to make savings with regards to the cloud-related costs. Now for health care business, you know that our [indiscernible] service and data platform business is in an expansionary phase at this point. So in the second half of the year, operating loss may widen. Now on AI, as you know, as of June we have completed the asset transfer from Kakao Brain, and hence we were able to narrow the gap that previously existed between servicing, planning of AI and foundational model development due to having separate entities. But after the merger and asset transfer, we are now able to speed up our AI service development. So from training the AI models up to the service launch, we now can apply a same and single AI ethics and AI philosophy, which will bring positive operational synergies such as paper data processing, building up a solid basis for us to further save down our costs. On a consolidated basis, there was no financial impact for Q2. But if you look at separate basis, we've seen about KRW 6 billion increase in the labor and infrastructure fee accounts. And in Q2, combining the Kakao Ko and the Brain, the -- all of the AI-related expenses amounted to around KRW 30 billion. We believe that in order for us to secure long-term growth for Kakao, innovation by AI is critical and essential. Therefore, after the asset transfer, we've been very swiftly undertaking cost efficiency measures and swiftly carrying out AI service launch through which we will actively explore opportunities for monetization. Due to the time constraints, we will now take the final question.

[Operator]

The last question will be presented by [ Colin Han ] from UBS.

[Unknown Analyst]

I'm from UBS. I would like to ask you 2 questions. Recently, I've read some news slides that said that KakaoTalk's MAU is trending downwards. What is the user engagement to look like at this point? And do you internally also have concerns regarding the decline in the user engagement? And what does the user activity picture look like at this point? Second question is you briefly talked about your second half outlook, but what about the overall market? What was the market like in the second quarter? And what do you think is going to be happening in the market in the second half of the year?

[Shina Chung, executive]

This is Shina again. I will respond to your question regarding the engagement of our users. Unlike what was mentioned by the article, if you look at our domestic monthly active users, it's 48,930,000. And since we've done the revamping on Talk, driven by the friend tab and open chatting, we've seen a significant increase in the time spent by the users, and we see that trend remain quite robustly in the second quarter, and the royalties and the lock-in effect of the users to our platform is staying intact. Now I understand that because the MAU level is about 95% against the total population of Korea, there is a concern that people have with regards to whether we will be able to further grow the traffic, whether that traffic growth will be capped. But if you look at the activity measures for each of the tab, you see that compared to the chatting tab, the other tabs still wield quite low level of user activity, which means that there is quite big potential that still exists for us to further drive up the traffic. So in the second half of the year, what we will do is carry out service announcements inside the Talk so that we can further enhance user convenience. And our objective, therefore, is to further drive up user traffic as well as user activity across all of the 5 tabs. We will select as key KPIs and monitor them very closely for each of the tasks, for instance, monitoring daily active users, number of frequency of their visits and number of active chatrooms opened. So against the user base that we lock in, we are going to provide them ample reason to come visit and use KakaoTalk other than the chat tab and increase their frequency of visits. At the same time, in so doing, we want to be able to explore additional business opportunities for our ad and commerce business. Moving on to your question about our outlook going forward. First, if you look at advertisement in the first half of the year, as Chinese e-commerce platform player started making inroads into the domestic market, this had an impact of introducing new marketing project. And Kakao was able to preemptively cater to their needs and was able to win that new marketing budget. Although it's only been 1 month since the start of the third quarter, we still have to wait and see a bit more. However, we are continuously receiving advertisers' proposals and requests. And we will, as we've done in the past, be able to satisfy the needs and the requirements of these advertising. But I also want to highlight the fact that aside from the increase in the advertisement budget that we are seeing from the Chinese e-commerce players, which benefited our advertisement revenue, there's a greater impact that's coming from the advertisers' marketing budget cut following the domestic demand or domestic demand slump. If you look at Talk display ad-related trends, aside from Chinese platform, advertisers mostly across the board we've seen in the industry year-over-year decline. And in light of the recent economic situation, we think that, that trend is going to continue into the near future. So in the second half of the year, we think that the competition is going to further deepen for different players buying to games that limited amount of advertisers' marketing budget? So for Kakao Ad for the second half of the year is supported by a very steep growth of our messaging business. We are going to be introducing a new branding display advertisement product and also come up with a product that caters to the needs of individual business operators or micro influencers, which will help us lay a cornerstone for our future and mid- to longer-term growth. Now moving on to commerce, if you look at domestic e-commerce market last year, we recorded a new historical high of KRW 229 trillion. Since then, we've seen slowing growth. And if you look at the second quarter's domestic online shopping GMV, increased by around 9% versus the previous year. Now if you look at the GMV growth trend for domestic e-commerce platform players, only handful number of companies are reporting high growth and the rest are at this point actually reporting a negative growth rate due to the entrance of the Chinese e-commerce player as well as the market skewing towards only a handful of top players. And we think that in the second half of the year, overall market growth or slowness of growth is going to continue, which is going to hit the mid-tier platform players. They will hit their profitability. And we, therefore, think that the overall market competitive landscape is going to undergo certain changes. Therefore, we need to keep very close monitoring or close tabs on how the market changes. Now for the Kakao Commerce business in the second half of the year we are going to be expanding the occasion and the context under which gifting will take place as we consider gifting as having less market sensitivity. And in terms of the other commerce domains, excluding the Kakao Gift, we're going to focus on personalization so that we can build a foundation for mid- to longer-term growth.

[Operator]

With that, I would like to now wrap up the Second Quarter 2024 Earnings Conference Call by Kakao. Thank you very much to everyone for joining us this morning.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]