Kakao Corp

KRX:035720

Earnings Call Transcript

[Operator]

Good morning. Thank you all for joining today. And now we will begin Kakao's Q3 2023 Earnings Conference Call. This conference will start with a presentation followed by a divisional Q&A. [Operator Instructions]

I will now turn it over to Kakao.

[Eleanor Lee, executive]

Hello. I'm Eleanor from Kakao IR.

Let's begin with the third quarter 2023 earnings conference call. Today, I'm joined by Simon Hong, the CEO. 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.

So now I will begin with business highlights of Kakao, the parent, and major business results from the platform business.

[Euntaek Hong, executive]

Good morning, and good evening, everyone. This is Simon Hong, CEO of Kakao Corp.

First of all, I wish to extend my sincere apologies to the esteemed shareholders of Kakao for the recent unpleasant news surrounding the acquisition of SM Entertainment. While the particulars of the ongoing investigation preclude us from divulging any specific details at this juncture, I assure you that we shall vigorously defend our position in the legal proceedings concerning the allegations linked to the SM acquisition process.

Kakao has undergone a remarkable transformation, evolving from a start-up to the operator of the foremost widely used service within South Korea. This evolution brings with it an augmented recognition of our social responsibilities. In acknowledgment of this reality, we are currently contemplating a strategic reassessment of our management infrastructure to implement a comprehensive organizational restructure.

We also acknowledge that safeguarding against business risk stands paramount among our shareholders' concerns. With this in mind, we are steadfast in our commitment to move forward with our existing projects in accordance with the established plans, ensuring minimal disruption and upholding our fiduciary duties.

With that, allow me to present our financial performance for the third quarter. During this period, Kakao has achieved a consolidated operating revenue increment of 6% on quarter and 16% on year to KRW 2.16 trillion. This growth is attributable to the collective efforts and resilience of the Kakao Group, striving to bolster our business amidst challenging business environments, both internal and external. Excluding SM Entertainment acquisition impact, our consolidated operating revenue stands at KRW 1.9 trillion, marking a 2% Q-o-Q increase and a 5% Y-o-Y increase.

Turning our focus to Kakao Talk. This year has been pivotal in our pursuit to enrich user communication. We have expanded the horizon of user interaction, facilitating connections that span not only acquaintances, but also semi acquaintances and individuals outside one's media social circle. Through the introduction of the interaction stickers and the [ Pong ] feature that vanishes after 24 hours, we have witnessed a more dynamic and casual user interaction commencing in Q3.

After launching, Pong has become a repository of treasured moments for users from capturing the beauty of change in scenery to commemorating family reunions during Korean Thanksgiving. The ease with which our users can now convey their current state of mind via emojis and reactions has fostered a vibrant atmosphere and engagement with the Friends Tab. The introduction of these features has fostered a new dimension of connectivity, one that transcends the conventional compliance of chat rooms. Although we are in the very early stages of this feature's release, it is encouraging to report that the uptake has been particularly robust among the demographic of individuals aged 15 to 24, a cohort renowned for their active participation across different types of social media platforms.

In Q3, Kakao Talk has launched 2 notable services; Local News and Friends tab, and Local tab on Open Chat. These platforms are designed to forge stronger connections between consumers and local enterprises. In the upcoming month, these new features will be strongly combined with another local service asset called KakaoMap. This integration is projected to amplify some synergies across our offerings and catalyze new business opportunities.

Once our local service offering is firmly established within the Kakao ecosystem, we anticipate that users will naturally refer to Local News and KakaoMap to discover dining options and other venues of interest around them. They will be informed of recent store openings and available promoters via the Talk Channel.

As more customers find out about the nearby stores and Local News and Talk Channel, store owners will be encouraged to timely update their latest store information, events and menu offerings on the store management platform on KakaoMap. And in turn, they will be more intrigued to find out more about advertising products with the Kakao local service.

When this is seamlessly integrated with the broader Kakao business tools which include reservation, ordering and payment, we are confident that we will not only enhance our advertising prospects, but also create a meaningful business opportunity for our e-commerce. This year, our focus has been on laying the groundwork for the sustained long-term expansion of Talk Biz. We have been vigorously launching new services. And beginning next year, we will initiate comprehensive monetization strategies to establish a trajectory of sustainable growth for the foreseeable future.

Next, Talk Biz revenue grew 3% Q-o-Q and 11% Y-o-Y- to KRW 518 billion. Regarding our Talk Biz advertising, we observed a marginal 1% decrease in revenue on quarter while Y-o-Y revenue saw an 8% increase.

Bizboard reported a 4% annual increase in revenue on the back of the augmented inflow of new revenue streams from Friends tab and Open Chat. Additionally, the Talk Channel achieved yet another record-breaking quarter in both the number of paying advertisers and the total number of Talk Channel friends, proving its superb efficiency.

For Notification Talk, there was a noticeable surge in revenue, largely due to enhanced engagement by the financial sector as we provided a custom scan feature designed specifically for financial institutions to mitigate the risk of spam and phishing. As a result, messaging ad revenue increased by 11% on year.

In our pursuit of expanding our advertisers' pool with long-tail partners, we have recently initiated a partnership with Yogiyo, one of the top food delivery platforms in Korea. Yogiyo will be integrated within one of Kakao's business solutions, Kakao food order and we are going to launch Kakao Order by Yogiyo in November.

We aim to progressively onboard 300,000 restaurant partners currently on Yogiyo into Kakao's advertising ecosystem. By extending API functionalities that facilitate seamless integration of Talk Channel messaging for partners like Yogiyo, we anticipate that our partners will actively engage with a variety of message-driven business models, including CRM initiatives. We are vigorously advancing the integration of large numbers of Talk Channels this year in collaboration with B2B2C entities just like Yogiyo that boost extensive partner networks.

By the year's end, we project the total number of Talk Channels to be close to 2.5 million, an increase of 700,000 from the previous year. Noteworthy is the fact that approximately 800,000 of these long-tail partners are not just quantitatively significant, but also qualitatively proven operators with the infrastructure to actively scale their business pursuits within Kakao Talk.

In essence, our affiliate model is crafted to ensure mutual growth, propelling the business of our affiliates and small business owners in tandem with Kakao's expansion. Transitioning to commerce business, we observed an 8% Q-o-Q and a 15% Y-o-Y increase in revenue. Total Kakao Commerce GMV for Q3 registered a 5% annual growth, reaching KRW 2.4 trillion. Talk Gift GMV reported a 7% Y-o-Y increase while Talk Store GMV saw a 2% Y-o-Y rise.

First on Talk Gift. The introduction of LuX tab has reinvigorated the dynamic of exchanging luxury gifts within closest relationships, contributing to increased activity across various categories including fashion, leisure, and luxury beauty. Consequently, the GMV of luxury brands was boosted 18% Y-o-Y growth, which considerably surpasses overall market growth. Furthermore, the gifts reservation feature was newly implemented for Korean Thanksgiving season in September, which effectively spread out crowded demand in turn, resulting in a near 10% Y-o-Y hike in GMV compared to previous year's Thanksgiving.

Moreover, Kakao Commerce plans to further fortify the self-purchase context within the Shopping tab by creating synergies across the board of our business platforms, which include Talk Channel, Talk Store and Kakao Shopping Live. In Q3, the Shopping tab witnessed a 30% increase in daily active users Y-o-Y following the rollout of MyStore feature. This tailored shopping curation space allows users to aggregate their preferred stores connected via Talk Channel and receive updates on new offers and promotions in real-time.

Kakao Commerce is committed to perpetuating growth by encouraging users to discover and connect with their favorite loved brands on Kakao Talk, engage with them via Talk Channel and finalize their purchases within the Shopping tab, thereby fostering a virtuous cycle of user engagement and commercial success.

Pivoting to new initiatives. First, on the AI business strategy, that is being collaboratively executed by Kakao Corp and Kakao Brain. In the immediate wake of ChatGPT's emergence, numerous global entities, including the major big techs intensified their efforts towards the development of foundation models, igniting a robust technological competition.

Yet, recently the spotlight has begun to transition toward the competition in a service-driven approach, steering away from an exclusive emphasis on the size of the model or speed of model development. It is anticipated that new patterns of competition will materialize contingent upon the unique services offered by each enterprise and the customer basis they have nurtured. In terms of foundation models, Kakao Brain has made significant strides in constructing various in-house foundation models across a spectrum of parameter sizes.

Concurrently, we are fine-tuning open-source models that are globally accessible. When it comes to the pragmatic integration of AI technology into our services, our strategy remains flexible. We are open to an array of possibilities encompassing our proprietary models, fine-tuned open-source alternatives, or those devised by leading global big techs and our decisions will be in accordance with considerations of cost-effectiveness and suitability for our intended AI services.

Kakao's acute understanding of the connectivity contacts within Korea is unparalleled, given our extensive user base that spans the entire nation. The AI services we plan to introduce will transcend traditional human-to-human interactions by forging new connections between people and AI. As an initial step, we are very near to launching AI content bots pilot test within Kakao Talk's Open Chat.

Currently, similar types of content bots only cater to more general categories of interest such as baseball or English Premier League. Our ambition is to further segment the categories of interest into, for instance, a baseball team or a player, and provide targeted content tailored by AI bots, which will, in turn, foster very strong communities bound by shared interests. We define this concept as micro vertical AI, and we'll further evaluate this service to ensure its utility to users and its potential for scalability.

Kakao Healthcare is intensifying its initiatives to expand comprehensive services within both the B2B and B2C sectors. Within the B2C segment, Kakao Healthcare is on schedule to secure business authorization by year's end for an innovative service designed to facilitate more efficient and predictive blood sugar management through integration with a CGM device. Given the rapid escalation of diabetes prevalence in recent years and our objective is to enhance the well-being of individuals managing diabetes, mitigate the incidence of this condition in at-risk populations and alleviate the associated socio-economic burdens.

For B2B, Kakao Healthcare is embarking on the standardization and consolidation of extensive clinical research data from medical institutions. Our aim is to establish a clinical data warehouse augmented by advanced AI tech and statistical capabilities in major leading hospitals in Korea in an expedited fashion. Following our partnership with Seoul National University Bundang Hospital in Q2, we anticipate finalizing the implementation at Ewha Womans University and Medical Center and Keimyung University Dongsan Medical Center within this year.

Moreover, we are poised to inaugurate a research collaboration network in Q4, which will be instrumental in fostering a comprehensive healthcare ecosystem and ensuring the competitive edge of clinical data assets. Furthermore, within the digital front door initiative, Kakao Healthcare's extensive hospital appointment service aimed at patients' convenience, we have successfully launched the premier Kakao Talk chatbot appointment system at Ewha Womans Medical Center in August and efforts are underway to expand this extended service to additional major leading hospitals.

Moving on to Kakao Enterprise. Kakao Cloud, an integral part of Kakao Enterprise, has been enhancing its technological edge through a strategic alliance with AMD, a leader in the global semiconductor industry. This collaboration is setting the stage for Kakao Cloud to make substantial inroads into the enterprise cloud market. By rapidly accumulating references across diverse business domains within the Kakao Group, including gaming, mobility and fintech, we are preparing to scale up our presence significantly.

During Q3, our capacity to deploy stable high-performance computing environments was demonstrated by providing the necessary cloud infrastructure for generative AI training within the Kakao Group. And additionally, in Q3, Kakao Cloud was selected by one of prominent AI services in Korea for their inference infrastructure, swiftly establishing a strong track record in the AI cloud industry.

Kakao Enterprise is on track to restructuring into an organization primarily focused on cloud-based operations. This comprehensive transformation, which encompasses streamlining labor force and transferring non-core businesses is expected to be completed by the first quarter of 2024 at the latest. Although Q3 reflected one-off restructuring-related costs, the operating loss has been on a decline compared to the previous quarter. Through this ongoing process of business optimization, we anticipate a rapid enhancement in profitability.

Moving on to Kakao's ESG endeavor in Q3. Kakao's Upcycle Green Project embodies Kakao's environmental responsibility by promoting the reuse and up-cycling of resources. With over 900,000 items collected from approximately 70,000 users, this project created more than 70,000 new items. This project not only contributes to waste reduction, but also stimulates the circular economy. Moving forward, Kakao will continue to innovate within the circular economy and contribute more to environmental sustainability.

In social aspect, Linkage Lab, Kakao's subsidiary was selected as the Best Company for Jobs Creation 2023 by the Ministry of Employment and Labor, highlighting Kakao's dedication to social inclusivity and job creation, particularly for people with disabilities. This distinction along with its previous award in 2022 -- 2020, showcases Kakao's efforts in expanding job roles and fostering an inclusive workforce -- for personnel disabilities.

In addition, Kakao Impact Foundation was awarded meritorious contribution to the revitalization of traditional markets by the President this year. This accolade is a testament to Kakao's efforts in supporting the digital transformation and revitalization of traditional markets ensuring that technological advancements benefit all sectors of the economy.

Lastly, on Kakao's shareholder return policy and our forward-looking plans, our Executive Team acknowledges the gravity of the recent performance of Kakao's stock price and is actively exploring an array of strategies to augment enterprise value and refined governance with the focus on mid- to long-term outcomes. Kakao has communicated its mid- to long-term policy to allocate between 15% to 30% of its annual free cash flow to our shareholders. This initiative commenced in the fiscal year 2021, and is projected to continue for 3 years.

As planned, we have consistently distributed 5% of our standalone basis free cash flow annually in cash dividends, resulting in a total aggregate distribution of KRW 49.2 billion over the preceding 3 years. Furthermore, we have upheld our commitment to the retirement of treasury shares targeting 10% to 25% of our annual FCF. Over the last 2 years, we have executed an annual average treasury shares cancellations, representing 50% of our standalone FCF, which includes a special cancellation conducted in the fiscal year 2021.

To date, this has culminated in a total of KRW 122.4 billion worth of treasury shares cancellation, which equates to 1.4% of Kakao's outstanding shares. For the current fiscal year, we intend to return approximately 30% of our standalone basis free cash flow, which represents the upper band of our previously stated range.

Looking ahead to the next fiscal year. We are preparing to unveil a strengthened mid- to long-term shareholder return policy, aligned with our shareholders' growing expectations and interests. Specific details regarding this updated policy will be disclosed following a Board resolution.

Next, I will walk through business and financial highlights.

Q3 platform and other revenue was up by 8% Y-o-Y and 5% Q-o-Q to KRW 428.5 billion. Kakao Pay's Q3 TPV was up by 18% Y-o-Y, reaching KRW 36.2 trillion and the revenue TPV increased 15% Y-o-Y to KRW 10.5 trillion. Kakao Pay, for its digital payments service, entered into a partnership with 11STREET and the kiosk of large fast-food chains, securing places with a high level of user activity. And by strengthening benefit offerings customized to individual users' lifestyle through events at nearby stores and payment discounts, double-digit growth was achieved across on and offline.

TPV of tens of millions overseas merchants from Japan, Macau, and others is rising fast, while TPV from inbound tourists generated from domestic Kakao Pay merchant is also rising. As a result, cross-border TPV was up almost 2-fold Y-o-Y with its share of total payment revenue expanding to above 10%. In digital finance, with the ramp-up of Kakao Pay Securities MTS, assets under deposit and TPV continued to trend up.

Next onto mobility. Supported by a steady revenue uptrend, Q3 mobility revenue was up by 8% Q-o-Q and 22% Y-o-Y. Even under suppressed overall taxi demand, our effort to scale up service operation helped maintain the growth trajectory, which will stick to in Q4. For parking business, we connect to more parking lots and more people subscribed to the parking pass. We expect the growth trend to be solid.

We also have adopted technology from Splyt platform, a mobility brokerage platform we invested early this year to respond to mobility demand from inbound and outbound travelers, which sharply rose since the start of the endemic. Since October inbound tourist can held Kakao Taxi using global super apps like Alipay and Ctrip. And we plan to gradually expand the linkage with local mobility apps of Southeast Asia, Japan and Europe.

So, moving on to content. I will begin with the music business. Music business is moving away from its structure of high dependency on handful of mega artists, as we see a large abundance built up for all of the artists and with the addition of SM artists, we have solidified the multi-label structure.

On this backdrop, the music revenue was up 7% Q-o-Q and 105% Y-o-Y, reporting KRW513.3 billion. During Q3, many artist groups, including The Boys, actively made appearances and 4 groups including, Rice and NCT Dream sold more than 1 million copies of albums, rewriting the quarterly record.

In October, Rice, their full length album recorded 1.6 million copies in first week of release, becoming a million seller for 3 consecutive terms. They will start a global tour, including Japan and the United States, which will continue into next year after the Seoul concert. At SM, starting off with full-length albums, NCT 127, a new boy group NCT New Team is gearing up for a pre-debut targeting the Japanese market. Kakao Entertainment and SM, together with our subsidiary in North America, will provide all-rounded support to our artists so that we may gain a solid footing as a K-pop major player.

Next is story and media business. Story revenue was up 8%, both Q-o-Q and Y-o-Y coming in at KRW 249.1 billion. In Japan, Piccoma GMV was up 7% Q-o-Q and 22% Y-o-Y, hitting quarterly record, becoming a #1 grossing app out of the total end market in Japan. Following last quarter's effort to improve the user metrics through service operation and marketing, revenue continued to grow. And despite rising A&P from marketing activities, profitability maintained a robust uptrend.

On top of great performance from major IPs, I Quit the Hero's Party, which was developed in-house based on the insight came from the data and expertise from operating the Piccoma platform, became top-grossing Webtoon. And another popular Webtoon, A Returner's Magic Should Be Special was made into animation, which started airing in October, created a positive loop in terms of traffic into the original Webtoon, once again attesting to competitiveness of Piccoma's content.

In the domestic market, we started using Helix Push, which is AI-powered, highly sophisticated CRM solution. Helix Push analyzes user behavior data, including search and purchase, upon which personalized content is recommended at the most optimal timing. Since the adoption, user retention and content usage increased, which drove up the ARPU.

In Q3, [ original ] screening adaptation of original webtoon IPs were released and movie received the most interest with its views on Kakao Page scoring more than 60 times. This interest spread to other IPs sharing similar universe, driving up the page view 9 times for the webtoon titled Bridge, which yet again showed a strong virtuous loop of traffic between webtoon and adaptation projects.

In North America, we revamped the platform, bettering convenience by making the main page look the same, both on the web and in the application, and added a new tab with only the major collection of stories, strengthening the nexus between discovery of consumption and users community engagement. In Q4, we will roll out a voucher that can be used to purchase selected episodes at one go and will diversify the advertisement [ BM ] and carry on with the additional enhancement. These efforts will help facilitate content consumption as we build out a basis for further growth.

Powered by full flight production of dramas, media revenue was up 46% Q-o-Q and 14% Y-o-Y to KRW 107 billion. During Q3, The Worst of Evil was released on Disney+ and Song of the Bandits on Netflix, both of which ranked #1 in domestic and landed on top 10 ranking in 6 major countries, which once proved our global IP production capabilities.

The Gyeongseong Creature is gearing up for a concurrent global release in Q4, produced by Kakao Entertainment and Studios, starring artist of the company and supported by Kakao Entertainment's internal production capabilities. Netflix's original non-scripted content, the Comedy Royale is also slated for release in Q4, as we continue to diversify into different content formats, including movies, dramas and entertainment programs. We will continue to solidify our standing as a global studio as we tap into multiple distribution channels, including the TV channels, Netflix and Disney+.

For the game business, through content updates and traffic management, we drove top line expansion and with efficiency gains from marketing, profitability improved comparing to last quarter. But on back of declining revenue from non-game business, including Kakao VX, due to prolonged economic recession, Q3 game revenue was down 2% Q-o-Q to KRW 262 billion. We expect non-games seasonality will continue in Q4. So, we'll focus on gaining added momentum for top line, while we continue to manage traffic to ensure a longer-term performance from the core game titles.

Next, moving on to consolidated operating expense and profit for the third quarter. Q3 consolidated operating expense was up 5% Q-o-Q and 18% Y-o-Y, reaching KRW 2,020.6 billion due to one-off expense arising from overall business structure improvements despite the conservative execution on labor costs and marketing spend.

Despite a 14 -- going into the expense breakdown, despite KRW 14.7 billion of one-off expense following structure changes in Q3, labor cost was down 1% Q-o-Q on conservative hiring across the company, while due to the consolidation of SM, there was 8% increase Y-o-Y with labor cost reporting KRW 467 billion in total.

Number of headcount as of end of Q3 on consolidated basis is 17,208, which is lower by 692 Q-o-Q due to conservative hiring and exclusion of consolidated subsidiaries, following the improvements in business structure. On a Y-o-Y basis, with the consolidation of SM, headcount increased by 1,284. But excluding SM, headcount fell 212.

On the back of higher production cost, following increase in the number of titles in the lineup and rise in the share of [indiscernible] product for Kakao Talk Gift, revenue linked expense was up 9% Q-o-Q to KRW872.1 billion. On a Y-o-Y basis, there was 23% increase due to SM consolidation as they have bigger revenue share proportion with the artists.

For your information, share of revenue-linked expense against total sales was 40.4%, up 1.1 percentage point Q-o-Q. Outsourcing and infrastructure expense was up 2% Q-o-Q and 21% Y-o-Y to KRW 289.2 billion due to a rise in fees, now linked to revenue. Despite conservative stance on spending, on the back of Kakao brand marketing and new businesses of Kakao Mobility, including the quick delivery and increase in the marketing activities following SMR's comeback, the marketing expense was up 5% Q-o-Q and 12% Y-o-Y reporting KRW 125.4 billion.

In Q3, marketing spend ratio against revenue was 5.8%. With KRW 25.5 billion of PPA amortization costs booked this quarter in relation to SM Entertainment and growing AI-related CapEx investment, depreciation and amortization increased 3% Q-o-Q and 30% Y-o-Y to KRW 198.4 billion. All in all, Q3 operating profit was KRW 140.3 billion with OP margin of 6.5%. And operating profit excluding SM is KRW 115.1 billion. On Kakao separate basis, Q3 revenue was KRW 655.6 billion, operating profit KRW 135.4 billion, and OP margin was 21%.

Next is on non-operating revenue and expense. Other revenue was KRW 72.8 billion, comprising of disposition gains from equity method and subsidiary shares. There was an increase of KRW 56.3 billion attributable to disposition of investment in Kakao Ventures fund. Other expense reported KRW 80 billion which includes impairment loss from intangible asset, disposition loss, donation and advisory fees.

Equity method gain was KRW 32.8 billion, up KRW 4.4 billion Q-o-Q from higher net profit of Kakao Bank. Equity method loss was down KRW 6.4 billion Q-o-Q to KRW 22.6 billion. Financial revenue was KRW 55.6 billion, mostly from interest, dividend income and gains from sale of financial assets. It was KRW 6 billion last Q-o-Q due to decrease in dividend income. Financial expense was KRW 70.5 billion which is mostly interest expense and there was increase of KRW 20 billion Q-o-Q due to the recognition of financial cost on non-controlling interest from Kakao Ventures fund. Q3 corporate income tax was KRW 79 billion. Given that when accounting for corporate tax expense on the basis of individual entities, the effect of deficit corporation was not reflected, which has resulted in higher effective corporate tax rate of 61.5%. As a result, the consolidated net profit came in at KRW 49.5 billion.

Last but not least, on CapEx, with continued investment into AI and data center, there was tangible asset investment of KRW 123.5 billion, including the machinery and construction in progress, and KRW 30.9 billion for intangible assets, including investment for content amounting to a total of KRW 154.4 billion of CapEx investment.

This ends the presentation for Q3 of 2023. We will now begin the Q&A. [Operator Instructions]

[Operator]

[Operator Instructions] The first question will be presented by Jingu Kim from Kiwoom Securities.

[Jingu Kim, analyst]

I just have one question that I wanted to ask. With regards to the recent social issue that's been created around the company, I do not feel the need to ask related questions, because I know that the company is making appropriate countermeasures and carrying out with the overall revamping of your business approach. So I need not ask questions regarding that.

My question relates to the AI business initiative that the headquarter of Kakao is currently taking. I would like to get some insight as to what potential services and added value you will be able to share back with your user base. For instance, making use of the personalized and tailored data, which you would have access to based upon your Kakao Talk platform. I would like to understand as to how you are planning on generating an added value from all of these basis of data so that Kakao once again could establish yourself and set itself up as Korea's flagship software company come next year.

[Euntaek Hong, executive]

Thank you, Mr. Kim Jingu, for your questions. This is Simon Hong responding to your questions. Two days ago, OpenAI made an announcement that they will, not just base the training of the AI models upon text, but we will gradually transition to a multimodal, basically training the model based on images and voice. So if a prompt is included in terms of images and voice and then the model, the AI model would provide you with a result to that prompt. Tesla is already making use of the videos that's been shot for -- and that recorded the driver's behavior and using that data to train its AI model. So basically, when it comes to generative AI, we are now transitioning into a multimodal context, moving away just simply from the text base, which means that the relevant cost base is going to increase. And I feel, therefore, it is very important for us to come up with the most appropriate AI strategy.

There is also a talk of GPTs, which is providing the builder to the user base so that they could, based upon natural language, create their own GPT models and services. And the company is saying that there will be a marketplace like an app store that will be provided, through which various different types of ChatGPT models could actually be sold, and then the relevant proceeds from that sales could also be generated.

So I believe that the -- one of the key pillars of future competition will be, who is going to connect that ChatGPT or they call it the GPTs with the actual users and the developers of the AI. I think that will also become an important area of competition for us.

Kakao hence is also developing its own, if I may call it, the GPTs. And I believe that we really have a strong positioning as a nexus and that connecting point between GPTs and the user base because mobile messengers is a service that is most frequented by its user base and aside from U.S. and the Chinese market, Korea is the only country that has its own-developed mobile messenger that is most prevalently used within a country. And also, we have access to users' behavior data and we are, therefore, able to provide more tailored and granular content for 100,000 or 20,000 units of user base not to -- not just one single type of content to 50 million users.

So in light of the strength that Kakao has regarding the service offering that we provide to the market, we are, I say, a service-driven AI approach rather than model-driven AI. And in light of the recent trends that we're seeing in the market, I think we can see that there is an effective validity when it comes to the service-driven AI model.

So there are some internal projects that are ongoing and 1 good case is the AI content bot. Before the end of the year, we will have about 10 different bots undergo the POC, proof-of-concept process, so that we will be able to validate scalability and the effectiveness.

So the AI content bot is basically going to source the tailored content from both domestic and global, and provide a most aligned information to the so-called micro-segment. So basically, a very granular segment and customer group with sharing a common interest, and we will be able to provide those inputs to different context of conversation.

So AI content bot basically is based off of people that share a common interest, and we will be able to see that that will help us really create a specific category of consumers, and that will open up an opportunity for us to partner up with many different types of business partners. And also this will open up an opportunity for us to expand our advertising business because these business partners that are highly relevant in terms of the content that the AI content bot actually delivers would provide them with an opportunity to be a sponsor, hence an opportunity for ad business will further open up.

We also believe that we can expect to call -- we can expect call to action, meaning in the context of shopping, fashion, and beauty, there are actual and real interest and actual behavior of purchase that's going to be involved in this whole process from first appealing people on certain interest and leading them to content consumption and up to purchase.

And last but not least, I previously in other conference calls mentioned that basically, this service is going to become feasible if we are able to reduce the unit cost per call below KRW 1. And as you know, we are in-house developing different AI content bots, as well as other services, and in this process, we will be using our own in-house developed foundation models, as well as the fine-tuned open-source models and the generative models of other global techs. In terms of this open-source-based foundation model, which we have fine-tuned, we were able to validate that we can serve these prompts at less than -- significantly less than KRW 1 per call. So I think that really goes to show our approach in terms of cost efficiencies and more practical approach of using the AI model is proving to be quite effective.

[Operator]

The next question will be presented by Dong Hwan Oh from Samsung Securities.

[Donghwan Oh, analyst]

I would like to ask 2 questions. The first one is the Kakao T Trucker that you have recently launched. I would like to get some color as to what the performance is looking like at this point and what's the future outlook is? And also, can you share with us the take rate of this service?

Second question, it seems your Kakao Healthcare service Pasta is being delayed. If you could give some update on that, that will be helpful. And I understand that the number of population in Korea who will get insurance reimbursement for the use of the CGM is only limited to 30,000 people. So, I would like to know what your projection is in terms of next year's top line revenue from this service?

[Euntaek Hong, executive]

Very good to hear from you, Mr. Oh Dong Hwan. Responding to first your question on Healthcare Pasta project. We're not just going to target type A diabetics. We will be expanding to target type B diabetics. And if you are including that number to the total addressable market that would lead to about 5.7 million population. And also the target user, especially if you also include pre-diabetic stage patients, that number will increase to 15 million. So I don't know if I could say it's a market size. But in terms of that potential in the market, it is quite significant. And so, we will start with diabetics but then we will expand to include other chronic diseases, including the high lipid, people who suffer from high lipid levels. We are at this point undergoing internal test and I understand we are almost ready to launch this service, but we have to also get market authorization from the relevant authorities as it is considered a medical device, and we will be able to receive that before the end of the year and we will be prepared to release the service anytime next year.

Responding to your second question about Kakao T's Trucker. The trucking market basically is much larger compared to the taxi market, as it is a middle-mile freight market and we are seeking to connect the users of such freight delivery, as well as the shippers of these cargoes. And with that in mind, we've made acquisition of 49% of a freight intermediary or brokering platform called Freight Yard. And we will be able to bring the big data and AI technology-related capabilities that Kakao Mobility has, and use that for efficient fleet management, and also for effectively matching the demand and the supply between the shippers and the delivery providers. We believe that we will be able to add value across the platform. At this point, Kakao T Trucker has not yet been officially released. It's in the pilot stage. Hence, it's a bit too early for us to share with you the relevant performances. But once we gain those information, we will come back to you and share that information with you.

[Operator]

Currently, there are no participants with questions.

The next question will be presented by Seyon Park from Morgan Stanley.

[Seyon Park, analyst]

I have 2 questions I would like to ask. Recently, we've seen a bit of a pickup on your Y-o-Y growth for ad business. Are you seeing some signs of improvement in terms of Kakao's advertisement revenue if you look out into Q4 and next year?

And second question is that, I heard that there is some negotiation going on regarding the fees and the take rates for Kakao Mobility? And do you think that that will have an impact on lowering your take rate on a net basis? I know that this will be a bit of a sensitive issue for you to talk about, but would appreciate your explanation.

[Euntaek Hong, executive]

Thank you, Mr. Park Seyon. This is Simon again. Thank you for the question. Advertisement market has slowed over the recent years because of the headwind from the macroeconomic backdrop. But starting last quarter, we are seeing a slight pickup and we expect that come next year, things will start to be more positive. And I say that because there are 2 reasons. First, we transitioned the View tab into Open tab and as a result, we were able to increase the amount of advertisement inventory.

And also, there is the Friends tab, and here we sell CPT ad products and basically, Friends tab usually was just a bridge tab where people would not stay for a too long of a period, what they would do is, they would select a friend that they will, for instance, communicate with and would leave that tab. But we've added features such as talk -- update of friends and also added local news. Right now, this is in a test phase, so it's not accessible in all of the locations. We're currently running the test at Bundang, Songpa and Seongnam. But with the adoption of these different features, we have seen time spent actually go up. And hence, I think that the CPT products going forward are going to be much more effective.

And then in terms of the advertisement revenue that we see -- volume that we see from the Daum platform, the decline has slowed, and we are expecting towards a bit of a rebound in the future. So the issue that we faced with previously was that, although we increased the advertisement inventory slots, number of advertisers that ran advertisements were insufficient. But with our strong focus on long-tail advertisers, we've been able to also grow the advertiser count and really establishing a basis for us to further improve on the revenue. But not just on the increase in the inventory side, we have seen increases in the number of businesses, who opened up their talk channels, which means that we will be able to move away from just the confines of the advertisement to a broader marketing-related features, which include the CRM as well. And with the use of such broader marketing tools, we expect the revenue to further increase. And once again, we are evolving from just advertisement-specific needs to a more broader marketing requirement.

So in a nutshell, if I was to draw out in 3 very important keywords for Kakao Corp. for next year, it will be local and non-acquaintances sharing common interest and micro-vertical. And all of these 3 keywords are very closely related to our advertisement business. And if all of these 3 factors really work well, that will have a positive impact on our ad business.

Responding to your question on Mobility, you asked about the take rate and the fee structure for the Taxi business. I admit that the take rate structure for the Taxi business is quite complex and complicated, and that actually led to quite a bit of social criticism. On the 18, we will have a round table discussion with 4 taxi groups -- 4 different taxi association, as well as taxi franchise association and Kakao Mobility, during which we will talk about the overall take rate structure, as well as revisit the franchise model. So we will start the discussion from fresh. It's difficult to predict what the outcome of this discussion will be. But as you would appreciate, if you look at just the regular taxis, which account for 60% of the entire portfolio, there is no fee that is applied. It is applied to the franchise taxis. And on the surface, the take rate seems -- is 20%. But as you know, the actual expense that the taxi drivers bear is not that significant. Anyhow, there will be discussion that will take place, and it is too early for us to predict what the outcome of that discussion will be at this point.

[Eleanor Lee, executive]

Ladies and gentlemen, that brings us to the end of earnings presentation of Kakao Corp. for Q3 of 2023. I would like to extend my deep gratitude to investors, analysts, and members of the press for joining us this morning. Thank you.

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