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 Q3 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.

[Jeffrey Shin, executive]

Hello. I'm Jeffrey from Kakao IR. Let's begin with the third quarter 2024 earnings conference call. Today, I'm 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.

Now I will turn it over to CEO, Shina Chung.

[Shina Chung, executive]

Hello. This is Shina Chung, the CEO. Let me begin by briefly outlining Kakao's consolidated financial results for the third quarter. For the third quarter, Kakao's consolidated revenue was KRW 1.9 trillion, a 4% decrease compared to the same period last year, while the operating profit reached KRW 130.5 billion, marking a 5% growth year-on-year. Continuing from last quarter, the Platform segment driven mainly by Talk Biz within KakaoTalk maintained solid growth. However, the Content segment showed somewhat disappointing results.

In the Talk Biz advertising, we faced a delay in the overall recovery of the advertising market. Some commerce sector partners, who had aggressively allocated budget in the first half of the year scaled back affecting display ads. However, the strong growth from business messaging offset this impact. Commerce also demonstrated steady growth, boosting by the expansion of self-gifting purchases in gift service. Additionally, platform others business maintained constant growth on the back of mobility and pay services.

In the content business, we started laying the foundation of -- for reaccelerating the growth of core businesses by winding down non-core operations. Kakao Games, for instance, decided to divest its stakes in Sena Technology, a non-core area to focus more on its main business, gaming. In the story business, following the withdrawal of Piccoma's operation in France during the first half of the year, Kakao Entertainment decided to discontinue services in Indonesia and Taiwan. Going forward, Piccoma and Kakao Entertainment story business will prioritize Japan and Korea, as core markets, where the core strength of webtoon and web novel IP originates.

We are continuously building on the foundation for growth by focusing on Kakao's Group core strength, as I mentioned last quarter. Given the challenging external market condition, it will likely take some time before the results to materialize. Nevertheless, we are persistently seeking opportunities internally and as illustrated in the content division cases, we're doing our utmost to proceed as planned with the divestiture of non-core businesses.

Next, I will outline the future direction of KaTalk and AI, which are key to Kakao's future growth. Currently, Kakao is reviewing the structure of services and tabs offered within KakaoTalk from a user experience perspective. When we look at various platforms that users visit frequently and spend a lot of time on, one common feature is the abundance of engaging elements that allow exploration without a specific purpose.

In contrast, most KakaoTalk users visit the platform with a clear intent, such as checking messages or sending messages. Given that the majority of traffic within the platform is driven by this intent-based communication, user engagement metrics for the second tab, the chat tab remains strong. However, we recognize practical limitations in significantly increasing activity metrics such as time spent or page views across the entire KakaoTalk service.

To address this, we plan to introduce new services that provide added value within KakaoTalk, increasing the element of entertainment and discovery. Our goal is to give users reasons to explore all tabs in KakaoTalk even without a specific purpose. By doing this, we aim to significantly boost user engagement in KakaoTalk next year, laying a solid foundation for renewed growth in our core business of advertising and commerce, as well as for new business opportunities. We'll communicate more detailed plans with the market once our business strategy for next year is finalized.

Next, I will discuss AI, another pillar of Kakao's long-term growth. To enhance the competitiveness of our AI services, Kakao has been strengthening the foundation from AI infrastructure to generative models, as well as the middle layer. This year, in particular, we established the AI Hub, the middle layer platform that allows for the integrated management of GPU resources and generative AI models across the company. Through AI Hub, Kakao Enterprise GPU infrastructure, which has supported Kakao Brain's language model training and Kakao Enterprise Resources, which are expanding AI infrastructure through in-house data center operations can now be managed and operated in a cohesive manner.

On the generative model front, we have integrated a variety of models into the AI platform, ranging from our own generative models to fine-tuned open source generative models, as well as global big tech models. This integration allows anyone within the Kakao Group to easily apply the most suitable model when developing AI services.

In line with the direction previously mentioned in earnings presentation, Kakao aims to apply a model orchestration strategy to deploy the most suitable and cost-efficient models for user-facing AI services rather than competing in the benchmark scores of massive language models. This year, we have secured 2 parameterized language models, Kanana, Nano and Essence and are currently developing a flagship language model.

However, when building services, we do not insist on using only our own language models. Instead, through model orchestration, we plan to use in-house or fine-tune open source models for low complexity tasks and [ soda ] models from global big techs for more complex tasks, thus maintaining cost efficiency across service operations.

With the solid establishment of these foundation layers beneath our services aimed at maximizing service quality, we're now preparing to sequentially roll out services from next year that will make AI a part of everyday life for everyone. The first example for our AI efforts is Kanana, which was unveiled last month at Kakao's if kakao Developer Conference.

Kakao has demonstrated its strength in building B2C services through the success of various launch services, resulting in the highest number of user touch points in the country. Kanana is a hyper-personalized AI service developed based on the interactive platform technologies and B2C service expertise that Kakao has accumulated over time. It inherent the familiarity and strength of KakaoTalk, aiming to naturally blend into users' daily lives, while leading the popularization of AI.

The Kanana app is fundamentally based on remembering the information users' input and the context of conversation. It features 2 personalized AI agents, Nana, which responds according to the individual user and Kanana, which listens and responds based on the context of relationship-based communications. Unlike typical AI bots, these AI mate respond with personalities tailored to individual users. This allows them to provide appropriate answers without needing additional context and even when asked about past events or previously input information.

They also proactively initiate conversations based on the user situation, offering relevant context as needed. The personalized AI mate Nana, which means [ I ] in Korean is always present throughout the app and in all communications. For example, it can use gift information received within family relationships to provide recommendations when discussing gifts with friends.

On the other hand, Kanana exists only within specific communications, analyzing conversations and providing information as needed. Kanana helps by -- Kana helps by participating only in the context of particular chat rooms. In addition to basic features such as summarizing and organizing key documents and files, it can also analyze conversations and take necessary actions in response to them.

Kanana's AI mates are designed to provide a variety of features that users need, connecting to other services through function calls to deliver more optimized experience for users' daily lives. We plan to collaborate not only with Kakao's internal [ D2C ] services, but also with various external application and services, creating a broader AI ecosystem centered around [ Kana ] to generate synergies. Additionally, we are making efforts to integrate AI actively within KakaoTalk itself.

Currently, our AI Commerce MD, which recommends projects -- products through the TikTok channel is undergoing beta testing internally and is set to be launched in the fourth quarter. The AI Commerce MD will serve as an online personal shopper recommending the trendiest products by considering the gifting context such as the gender or age group of the recipient, thereby reducing users' decision-making burdens and enhancing satisfaction upon receiving gifts.

Moreover, the feature called [ peak signal ], which was introduced this year, ensures safer use of KakaoTalk. We have further advanced our anti-abuse system using AI, enabling the automatic detection and warning of fraudulent impersonation profiles and even enforcement measures. Starting next year, we plan to unveil a range of new AI-powered services and features within KakaoTalk, including Kanana. We anticipate that these innovations will lead to the creation of new business models that will offer revolutionary value to users and partners alike.

Next, I will briefly discuss the achievements of Kakao Group's new initiatives, Kakao Healthcare and Enterprise.

First, Kakao Healthcare has shown remarkable performance, as a health care app targeting the specific virtual of blood glucose management. Since launching PASTA this February of this year, the app has reported 130,000 downloads within just 9 months. Currently, over 180 medical institutions nationwide are using PASTA Connect Pro, allowing medical professions to incorporate patient's daily blood glucose management patterns and their consultations.

As a result, PASTA is establishing itself as an essential chronic disease management app for diabetes patients. Additionally, it connects with various health care devices, including mobile health apps and wearables, enabling comprehensive management of biometric and activity data. This has also positioned PASTA, as a lifestyle management app for wellness purposes, showing a higher-than-expected retention rate among general users. In addition to CGM, PASTA has started to integrate the Bluetooth-enabled blood glucose metrics, allowing us to gradually improve usability and expand the platform ecosystem.

Also, Kakao Healthcare's data platform business aiming to standardize and digitalize medical data managed by individual health care institutions. This will significantly reduce the project durations and improve accuracy of real-world evidence research conducted by various organizations, including pharmaceutical companies, CROs and academia. By the end of this year, we expect to complete data platform installations in 10 major hospitals with 17 in total by next year, creating the largest data research network in Asia.

Starting next year, we anticipate the data platform business will become a new revenue base for Kakao Healthcare. Kakao Healthcare has steadily laid the foundation for growth. And starting next year, we expect improvements in the losses driven by revenue growth to become more apparent. It is projected to turn EBITDA positive by 2026, which will gradually contribute to consolidated operating profit.

Meanwhile, Kakao Enterprise has significantly enhanced the performance of Kakao Cloud virtual machines and clusters, continuously striving to strengthen its competitiveness to level the global CSP. Going forward, Kakao Enterprise aims to establish itself, as the core cloud infrastructure partner at Kakao Group, as it steps in the AI era.

Next, Jayden will present the third quarter financial highlights.

[Unknown Executive]

Good morning. I'm [ Jayden Shin ], Kakao's CFO. Let's run through the Q3 financial highlights of Kakao and subsidiaries.

Consolidated revenue came in at KRW 1,921 billion, down by 4%, both on year-on-year and quarter-on-quarter basis. Platform revenue was KRW 944 billion, flat Q-o-Q, but up by 7% Y-o-Y.

Diving deeper into Kakao's core business, Talk Biz revenue came in at KRW 507 billion, up 6% Y-o-Y, while coming down by 1% on quarter due to low seasonality in the ad market. Ad revenue under Talk Biz was KRW 292 billion, up 4% on year, but down by 5% on quarter.

In terms of product breakdown, the business messaging saw the number of active advertisers rise by 10% year-on-year with an increase in the number of brand advertisers adopting Talk Channel, as their key avenue of communication, coupled with the sizable increase in users, who want to stay connected with the brands they like through the Talk Channel, the total number of Talk Channel friends increased by 17% year-over-year.

This drove business message revenue up by 21% Y-o-Y, sustaining a solid double-digit growth trend. There has also been greater use of premium templates, which supports images and videos and messages, leading to enhance the user experience and advertising efficiency. And so, we expect this will lead to healthy and quality-driven growth.

Next, Talk Display ad revenue fell by 1% year-over-year on the delayed recovery from the sluggish domestic economy and the ad market. Especially in Q3, price competition deepened on the back of Chinese e-commerce players entering the market, as well as the large-scale payment delays in the commerce industry, which led to a large reduction in marketing spend by mid- to smaller-sized commerce partners.

Although tightening of marketing budget is prevalent across the ad industry, cloud share of advertisers' marketing budget seems still very small when comparing to the influence of CloudTalk, as a platform. Thus, we are planning on winning an additional marketing budget coming next year by launching a new full-screen ad product before the end of the year.

Last month, we ran a beta test -- beta release of [indiscernible] product in the Open Chat tab, the third tab in KakaoTalk, enabling a highly impactful message delivery through a full-screen video ads. And in December, we will introduce a new product using the updated profile segment of the Friends tab.

Next, combined GMV of Kakao Commerce in Q3 increased by 5% Y-o-Y, reporting KRW 2.5 trillion with the revenue reporting KRW 215 billion, up by 8% on year and 4% on quarter. We diversified the gift lineup for Talk Gift ahead of Chuseok holiday and scaled up product curation for Chuseok within popular categories, which helped to drive the Y-o-Y GMV growth of 6%.

We also broadened the network of global high-end brands for the [ last ] tab going beyond the domestic market. And based on the relationship with these brands, we were able to diversify the premium product offerings, delivering distinct value to the top gift users.

In Q3, we upgraded the benefit reward program to drive the repurchases, which led to an encouraging outcome of 30% Y-o-Y growth in self-gifting GMV. As of now, the mix of self-gifting GMV is still quite low out of the total base, but we expect it will evolve into a new growth lever, reinforcing the scene in which users buy the gifts for their own use.

The Talk Store GMV fell 7% on year on the back of deepening price competition in e-commerce and slowing consumption against high inflation, which led to a decline in demand for Talk Deal. However, revenue inched down just 3% Y-o-Y due to the growth of the Kakao Shopping Live and Commerce ads, which has relatively higher margin. Our plan is to identify the new opportunity in the discovery-driven commerce market by scaling up hyper-personalized shopping curation for Commerce Talk Channel and Shopping Tech by year-end.

Next, the portal revenue was down 8% on year and 13% on quarter to KRW 76 billion. Seasonal events like the Olympics drove the Q-o-Q rebound in daily average search queries, but user metrics trended down across the app. And due to the low seasonality of ads, revenue posted a decline.

Lastly, the platform and others revenue, which includes the Mobility and Pay was up 13% Y-o-Y and 2% Q-o-Q, reporting KRW 360 billion. Demand went up during the Chuseok holiday and the monsoon season for the mobility business. And on supply increase and service upgrades, we achieved a steady revenue growth. Kakao Pay also saw the double-digit TPV growth across all of its services and also recorded a positive EBITDA for 2 consecutive quarters.

Next, content revenue for Q3 was KRW 978 billion, down 14% Y-o-Y and 7% Q-o-Q. First, the Q3 story revenue was KRW 219 billion, down by 12% Y-o-Y, but flat Q-o-Q. For the story business, we are laying the foundation to maximize growth through a selective focus. We will realign global IP business centered around Japan, which is the world's biggest entertainment market and underpinned by the domestic market working, as the primary base for IPs grounded on a solid user pool. Our plan is to harness the creators' capabilities, operational know-how and together with the lineup of competitive titles, which we have built over the years, will drive better operational efficiency even with the limited resources and create a successful cases for the IP business.

Amidst deepening market competition, Piccoma ran active promotions around the major titles, hitting the record high GMV in the third quarter, while ranking #1 in top grossing app in Japan, which in terms of year-to-date basis. Despite having spent quite a large amount of marketing costs in light of the market situation, there was a natural decline in expense following a withdrawal from the friends. And thus, operating profit for the quarter recorded a sizable increase compared to the last year.

To keep up with the solid performance, Piccoma is focusing on strengthening the competitiveness of its IP. We are closely collaborating with the Japan's local publishing houses and are starting to see the tangible results from sourcing in-house development content. For example, a webtoon was made from an IP that won the web novel competition. And when it was released, it ranked #1 on top grossing webtoon list and even drove the original web novel to the top list as well, attesting to the virtuous IP cycle that we can -- that we -- that can be truly successful. Based on the Piccoma's user pool, we'll solidify the competitiveness across the entire IP value chain from exploring to development of titles.

Moving on to the music business, due to the base effect of selling more than 4 million copies of NCT Dream album last year and because the artist performances mostly took place last quarter, the music revenue was down 8% Y-o-Y and Q-o-Q to KRW 470.9 billion. But IU and IVE world tour and NCT 127 LP album release led to more than 1 million copies being sold, attesting to strong competitiveness of the IP lineups of our own studio artists. We'll showcase new artists and more active artist appearances and involvements and is planned for next year grounded on a solid IP lineup.

Lastly, the media revenue was down 49% year-over-year and 39% quarter-over-quarter to KRW 55 billion due to the base effect of having highly concentrated content production in the second half of last year and sluggish media advertising market and inevitable delays in the production schedules.

Next is operating expenses. In line with our second half economic and business outlook, we expected a slowdown in revenue trend and thus, preemptively focused on stronger efficiency gains in Q3. And as a result, the consolidated operating expense was KRW 1,791 billion, down 5% Y-o-Y and 4% Q-o-Q. While maintaining a conservative stance on new hires, there was a decline in other labor costs, including bonuses, which drove the labor cost down by 2% on year and 5% on quarter to KRW 559 billion.

Cost of revenue was KRW 748 billion, down 12% Y-o-Y and 6% Q-o-Q, impacted by the delay in screen adaptation by the media business and subdued revenue from the content-related businesses. For your information, the proportion of cost of revenue against the Q3 revenue was 39%, down 3 percentage points year-over-year and 1 percentage point quarter-over-quarter.

Outsourcing and infrastructure expense was KRW 194 billion, down 2% Y-o-Y on the back of the reduction in fees from the content business, but was flat Q-o-Q.

Kakao Piccoma expanded the strategic marketing activities to respond to the fierce competition in Japan's digital manga industry. But through efficient marketing spend from other businesses, the marketing expense was [ KRW 106 billion ], flat Y-o-Y and down 3% Q-o-Q. Proportion of marketing spend against Q3 revenue was 5.5%, up 0.3 percentage points Y-o-Y.

Depreciation and amortization reported KRW 211 billion. With the commencement of data center operation and depreciation and investment into equipment and machinery for the AI business expanded, driving the expense up 6% on year, but only 2% on quarter.

All in all, Q3 consolidated operating profit was KRW 130.5 billion, while operating profit margin was 6.8%, improving 0.6 percentage points Y-o-Y. On a stand-alone basis, the Kakao Corp.'s Q3 operating profit was KRW 101.7 billion with OP margin at 16.4%.

As mentioned during Q3 earnings call, the business transfer of Kakao Brain was completed last June. And starting Q3, the earnings are booked under the Kakao's separate basis statement. There was no impact in consolidated earnings for Q3, but on a stand-alone basis, operating loss impact was KRW 30.2 billion following the transfer, and we expect to see similar level in Q4. Separate basis operating profit in Q3, excluding the impact of Kakao Brain was KRW 131.9 billion, and OP margin is 21.3%.

Non-operating profit in Q3 came in at KRW 5 billion, and there are 2 points to note specific to this quarter. Following the vendor payment delay issues of TMON and WMP, Kakao Pay made advanced refunds to protect the consumers, and it incurred KRW 31.2 billion of one-off expense, which is captured under other bad debt expense. And secondly, we sold the equity stake in Sena Technology in Q3, which gave rise to the gains from disposition of investment in subsidiaries.

Q3 corporate tax was KRW 57 billion, leading to consolidated net profit of KRW 78.5 billion.

Lastly, on CapEx. Total CapEx for Q3 was KRW 90 billion. There was KRW 63 billion investment for tangible assets and KRW 27 billion for intangibles. CapEx decreased by KRW 80 billion Q-o-Q due to high concentration of investments for GPUs and machineries for AI business during the second quarter. CapEx was down by KRW 64 billion on year-on-year basis due to the base effect of making significant investment into equipment and supplies required for the construction of our own data center last year.

This ends the earnings presentation for Q3 of 2024.

[Jeffrey Shin, executive]

We will now invite our questions. Please limit your questions to two per person.

[Operator]

[Operator Instructions] The first question will be presented by Eun Jung Shin from DB Securities.

[Eun Shin, analyst]

I have 2 questions regarding your AI business. I would like to know as to when the official service launch would be for Kanana. I would presume that it will be in 2025. And also, if you could provide some more information on additional investment that will be required for this AI services. And what is the company's monetization model?

Second question is, you've also mentioned that Kanana will be released as a separate application. When that happens, do you -- are you not concerned about a potential cannibalization with KakaoTalk.

[Shina Chung, executive]

This is Shina. I will respond to your question about Kanana product. And regarding the launching timing, as well as monetization and investments for us going forward, I would like to cover those grounds.

Firstly, with respect to the timing of the launch, before the end of the year, we will start with a closed beta test, CBT test inside the company. So we will operate the CBT for a certain period of time, and we will start to reflect the points, where we need some improvement. So after the in-house CBT is complete, most likely in the first half of -- excuse me, first quarter of next year, we will run a CBT test against the user base. In that process, we will receive various different feedback from the users, and we will reflect that in further enhancing our service.

Now regarding the monetization model, we are at this point thinking about a subscription model. But in terms of the details, it is yet to be decided. We will go through the CBT and see what the user behavior looks like, and we will be able to most likely share with you the details after we have an official release of the service.

Regarding expenses and the investments that will be required, since the official service operation will begin next year, it will be quite hard to tell you, as to the absolute size of the expense and the investment that's required. It is a bit too early for us to predict that. However, I can tell you that all the operational-related expenses that arise from running Kanana next year is closely linked with the traffic that is powered by our AI services. So as mentioned in my opening presentation, we are going to actively make use of model orchestration strategy, so that we can provide the services supported by a very reasonable cost structure.

You also asked about potential cannibalization with KakaoTalk, but I can tell you that the starting point for KakaoTalk, as a messenger and Kanana are quite different. So we're not concerned about cannibalization. We actually have higher anticipation because this will enable us to expand into new service domain. Because KakaoTalk is a messenger that supports communication amongst users, whilst Kanana is an AI mate and it's an interaction tool that actually adopts a conversational platform. So it is an AI-powered service. Hence, there is a distinction between the 2.

For KakaoTalk, the AI scene is also going to be implemented on top of KakaoTalk in terms of making connections between the users. On the other hand, there are certain aspects that will be quite difficult to implement on top of KakaoTalk platform, in which case, we will be using the Kanana, as a scene, where we can facilitate interaction between the AI and the user. And based upon the AI technology, we will be able to carry on with various different functions. So we are planning on creating a new use case.

Of course, with the release of Kanana, the types of communication is going to be further segmented, but there will be some aspects that will overlap with what KakaoTalk is doing. But if you look at some other cases like Meta, Meta has different types of communication platform within it, instance, WhatsApp and Facebook Messenger and Instagram DM. So there's a very segmented communication avenues. So there may be some overlap, but still Meta is able to expand its highly loyal user pool.

Just as the case is with Meta inside Kakao, if you look at KakaoTalk, it has 50 million user base in charge of communication amongst people to people. And now there is going to be Kanana that's going to facilitate new type of interaction between the AI agent and the people. And this AI agent is an agent that really has its own characteristics and understands the personality of the person, who is making that interaction. So we believe that Kanana will be able to further expand the highly loyal user pool inside Kakao ecosystem.

[Jeffrey Shin, executive]

Next question, please.

[Operator]

The following question will be presented by Hyo Jin Lee from Meritz Securities.

[Hyo Jin Lee, analyst]

I have 2 questions that I would like to ask. Can you provide us as to what the outlook or the color is for the fourth quarter, excluding the impact of seasonality? And also in the opening presentation, you talked about Kakao Healthcare. Also, can you provide us with a little more color in terms of the financials and some of the metrics and numbers that you're seeing from your health care business?

[Unknown Executive]

This is Jayden. Responding to your question about our Q4 consolidated financial outlook. If you first look at Talk Biz, during the fourth quarter, we expect supported by the fundamentals -- a very solid fundamentals that is of KakaoTalk and on top of which there's going to be high seasonality impact, we believe our advertisement and commerce business will continue to record an upward trend.

If you look at Q4 and specifically the Talk Biz ad revenue on a year-over-year basis, business messaging is going to yet again power growth forward. And also, on a Q-on-Q basis, there is the high seasonality impact, which is going to further support with the uptrend.

Looking at the Talk Display ad, it will also be supported by high seasonality impact. So we are expecting a Q-on-Q increase in revenue. But admittedly, there is an unfavorable macro backdrop in the advertisement market. So we expect that the uncertainties will persist.

In terms of our commerce business at the end of the year, there is -- it's the high season with holidays like Christmas and year-end occasions coming up. And we are going to be offering high-end premium product that mostly fits the occasion. And by providing various different reward benefits to the users, we believe that we will be able to continue on with a steady-state growth of GMV, as well as top line growth.

For Talk Deals, we are going to strengthen our targeted marketing using the Talk Deals message. We will further scale up personalized curation under the shopping tab, which will help us bring about a rebound in a GMV uptrend.

For other platform business, if you first look at mobility, at the end of the year, there is going to be an increase in demand, and we will be providing more supply into this business. So as we do that, we think the top line revenue is going to show Q-o-Q, as well as Y-o-Y growth.

Now having said that, if you specifically look at our taxi business, as we are diversifying into various different franchise products, there's higher uncertainties with respect to the profitability or the bottom line of this business.

In terms of Kakao Pay, supported by steady growth of its TPV, the securities and insurance business has released new products and services, and we believe that this is going to help with a continuing profit improvement of the financial services business of Kakao Pay.

For content business in Q4 compared to our platform business, we think that the performance is going to be subdued. If you look at our story business in Q4, there's going to be a full-fledged launching of new titles upcoming. And in Japan, we will be exclusively distributing Solo Leveling: Ragnarok, and we think that's going to help with a slight inching up of our top line revenue.

For Piccoma, we continuously source highly competitive titles and will expand into other IP genre, and we're really focused on further enhancing its fundamental competitiveness, so that we may be able to maintain our market share despite a very fierce market competition.

Now music business, as you know, IVE has sold about 1.9 million copies on a Y-o-Y basis. But if you look at Q4, the artists album-related activities are absent. And so, we think that it's their contribution to revenue is going to be lower compared to the previous term.

If you look at media business, there's going to be more number of titles generating production revenue, including Karma, When Phone Rings and The Wonder Fools. And so, we are looking forward to a Q-on-Q rebound in top line revenue. Last but not least, our Kakao Games business, there's going to be absence of new game title lineup come Q4. And that impact, we think, is going to continue to feed into the numbers in Q4.

Now on expense items, just to go into a little more detail and looking at labor cost and marketing expense outlook. If you look at our labor cost in Q4, we continuously have a very conservative stance when it comes to new hiring. And now, we are seeing impact from the efficiency gains that we were able to derive from last year's business structure reorganization. So we are looking forward to a single digit increase in terms of labor cost. Just for your information, on a cumulative basis, as of the third quarter, labor costs increased only 2.2% compared to the previous year.

In terms of marketing activities, we will maintain the level of activity that we've seen in the previous quarter, so that Piccoma can maintain its market positioning. So on a year-over-year basis, marketing expense is expected to inch up slightly. But as per our guidance, which we shared at the beginning of the year, marketing expense is going to be kept within the scope of 6% against the consolidated revenue. And so, we project that our spending will be in line with the annual guidance that we previously shared. Just for your information on a cumulative basis, compared to the consolidated revenue, marketing expense accounted for 5.1%.

We believe that macro headwind will continue into the fourth quarter, and we are projecting a slower growth for content business. So we will focus on cost efficiency, and we'll try to identify levers for reacceleration of growth that is underpinned by KakaoTalk and AI services, so that we may lay the basis for a new growth engine going forward.

Also responding to your question about our health care business, PASTA, which is our health care service, has only began its services. And so, the absolute size of sales is not that big. But on a Q-over-Q basis, we've seen about 60% growth. If you look at the CGM penetration, the continuous glucometer penetration for type 1 diabetics in Korea, it's very low at only about 10% compared to other developed nations. And also, if you consider the fact that the population of type 2 diabetics is about 10x that of type 1 and the possibility of CGM receiving coverage under insurance reimbursement, I believe there is a big potential for growth for us going forward in terms of market growth that is.

So this year, through PASTA app, we were able to showcase very innovative features that's required for effective blood glucose management. And despite the fact that this was the year 1 of Kakao Healthcare's entry into the CGM market, it now has a very meaningful market share of around 20%. And we believe that the PASTA growth going forward is going to be in step with the overall market growth.

For our data platform business, despite the fact that we only have 5 medical institutions that's joining in on the medical data analytics platform, already, we have 8 projects that have been additionally confirmed, including the ones were the global pharma companies, 6 global pharma companies. And we believe that this business will start to make tangible contributions to sales starting second half of next year.

So thus, we are projecting about KRW 13 billion in annual sales, which is going to be 3x higher compared to the past, this is regarding Kakao Healthcare revenue. So considering the fact that as a health care company, Kakao Healthcare, it's only their second year into business that this is a very encouraging metrics. And in light of the characteristics of the health care business, it is true that it is quite time-consuming for a company to lay the basis. But in order for Kakao Healthcare to reach that tipping point as quickly as possible, it is endeavoring into building the basis for the business.

[Jeffrey Shin, executive]

As we're running out of time, we will now be taking the final question.

[Operator]

The last question will be provided by Jee-un Lee from Daishin Securities.

[Jee-un Lee, analyst]

I am Jee-un from Daishin Securities. I just have a short question regarding your advertisement and commerce business. For the commerce business, we've seen a very steady growth on a quarterly basis. Do you foresee that you will be able to continue on with this trend? For advertisement, despite the market being quite unfavorable, you are able to trigger growth with your messaging ad. And when would you think that -- up until when do you think that you will be able to sustain this trend?

[Shina Chung, executive]

Yes. This is Shina responding to your question about advertisement and commerce business. First, looking at the overall market backdrop and next year's outlook, it is correct that there is delay in the recovery of the domestic economic situation, as well as the advertisement market. And in Q3, this issue were compounded by delays in payment to the vendors, which had a negative impact on the smaller to medium-sized commerce partners. And so, they had to scale down on their marketing activity. And the same situation is persisting, we believe and will persist into the fourth quarter as well. And looking at the economic growth outlook, it's very difficult and unclear at this point, as to when things will start to turn.

Despite these macro headwinds, if you compare the amount of share that Kakao has against the total marketing budget and you compare that to the influence that we have in terms of traffic and the media power, we believe that we still have potential to grow. And so we will be releasing new services so that we can strengthen user engagement. And if we are able to provide the most appropriate business model, we are certain that we will be able to turn the top line growth trend once again.

You also mentioned business messaging and we are seeing both number of active advertisers and number of Talk Channel friends all growing. We think that not just in the fourth quarter, but next year as well, we will be able to sustain a double-digit growth. And we see that the financial verticals, including the banks, insurance companies and credit card and securities institutions are making use of the sending of the information messages, info messages and we are expanding to various different verticals and we think that such a growth from the financial vertical will continue.

Now, aside from such so-called information messages, the channel is being expanded as a very important and essential marketing channel that helps with the strengthening of the retention. So, we believe there is a big potential from a long-term perspective. And so for this year, the business messaging annual revenue is projected to be around KRW 400 billion. And we think that in the longer term, we will be able to grow the top line at least by two-fold and we consider this business as a sustainable business.

So, divesting a little bit from advertisement, but basically, next year, the area that we will really have a laser focus on is our subscription services like Emoticon Plus and Talk Drive Plus, we are seeing subscription revenue being incurred. On an absolute basis, the size is not that big, but they are less sensitive to economic cycles. And we believe that this is a business that could sustain a quite steady state of growth and that's why we are going to focus more on these domains.

Just to give you some reference, if you look at the third quarter subscription and other categories, revenue mix out of total Talk Biz advertisement, it's around 28%. And if you look at the number of unique subscribers subscribing to Emoticon Plus and Talk Drive Plus, it's about 4.2 million. Going forward, KakaoTalk is going to continuously release innovative features that really caters to the needs of the users. And if these new functions are able to prove its effective utility, I think that the users will be able to choose various different premium functions and features aside from emojis and Talk Drive, and that will lead to a new business opportunity through the subscription model. So, with respect to this topic, we will be able to come back to you during the fourth quarter earnings call for more detailed plan.

Now responding to your question about our commerce business. First, looking at the overall market backdrop. If you look at online shopping GMV growth rate for Q3, this was lowest ever at about 2%. And because of high inflation and slump in the consumption sentiment, there is a very clear trend of a slump in the e-commerce market. On top of that, there was the whole issue of vendor payment delays that made things very difficult in the market. And we are seeing out of that some of the reorganization happening amongst different platform players in the market. So, it's now very difficult for upper-tier platform providers to be able to defend their profitability or their margin and at the same time, aggressively expand market share. However, under this very difficult situation, Kakao Commerce is leading the domain of gift market and that's a very important pillar behind our profitability and our growth potential. And even aside from Kakao Talk Gift, we also have discovery-centric commerce approach, which will help us identify new opportunities in the market.

Now, just to share with you what our growth strategies are for Kakao Talk Gift and the non-gift domain. First, Kakao Talk Gift is a strength that Kakao has. And here, we are going to further increase the percent of self-gifting and also increase more occasions and events where people would gift one another. As I mentioned in my opening presentation, other than increasing the self-gifting percentage, we are going to expand different scenes and context under which people could gift one another aside from just giving birthday gift. So, we have plans in place to scale this up.

So for example, what we did is after we revamped the profile segment, we made things quite simpler and also we upgraded the D-Day feature where people can very actively exchange different gifts at days that are so-called memorable occasions inside Kakao Talk. For instance, for mobile wedding invitation is linked up with the profile D-Day feature and you're sharing that information with people you know. And also, you can set the graduation date and dates that you're going to take an important exam. So, all of these records are being accumulated in Kakao Talk and these are memorable occasions where people could gift one another. So, we are expanding the occasions where gifting can take place. And as a result, as of Q3, on a monthly average, we have about 1.8 million D-Day related data that's been generated. And so we will make use of this data and make it easier for people to discover important events, memorable events in people's daily lives and also will release a various different features that will help people to and recommend people the most appropriate gifting that best fits the occasion.

For commerce that is non-gift, we're going to scale up hyper-personalized shopping curation supported by the competitiveness of Kakao and the ethos of Kakao, which is communication. So, in various different relationship scenes, we are going to build a participatory commerce community so that we can strengthen our capabilities in the discovery-driven commerce market. In terms of Talk Deal, if you look at the amount of GMV that is generated from Talk Channel, it's about 30%. So in the past, we were just sending out same messages and same promotion to all of the friends of the Talk Channel. But before the end of the year, we're going to further segment the buyer segmentation and we'll be able to provide more personalized shopping-related benefits and deals that is well in line with the track record and the preferences, the preference profiles of the buyers, which will help us lower the fatigue level and make it more effective for people to make real-time-based discoveries, which will really help with purchase conversion. And we believe that this is going to maximize the synergies between advertisement and commerce and drive GMV growth.

Lastly, starting Q4 up until first half of next year, we're going to sequentially further upgrade the shopping tab. At this point, we admit that our shopping tech lacks content that can really be appealing to the users so that we can increase their time spent. That is why we are unable to, at this point, reach the user engagement metrics that we would have liked. Therefore, sequentially, we're going to diversify the shopping tap scene. And based upon the track record of the buyers, we're going to be able to recommend more personalized products and also help people in the same group of people who share same taste and same ages for them to easily identify most trendiest merchandise and also provide them with a commerce-based content community whereby they could communicate and discover the products that they wish. So, we will do our best. We are, at this point, coming up with detailed action plans. And once they are complete, we will come back to you and be able -- when we will be able to share with you those details.

[Operator]

Well, that concludes Kakao Corp.'s 2024 Q3 earnings release conference call. Thank you, everyone, for participating in today's call.

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