Kakao Pay Corp. (A377300) Earnings Call Transcript

Good morning, and good evening. Thank you all for joining the conference call for the Kakao Pay Earnings Results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on Kakao Pay's Third Quarter of Fiscal Year 2025 Earnings Results.

[Interpreted] Good afternoon. This is Allen, CEO at Kakao Pay. Thank you all for joining our earnings call for the third quarter of 2025. Let me begin with key metrics for the third quarter '25 and talk about TPV, consolidated operating revenue and expense and P&L, then move on to business highlights for the quarter. First, on key metrics for the third quarter. Q3 '25 TPV increased 12% year-on-year, reaching KRW 47 trillion. Revenue TPV was KRW 13.4 trillion, up 8% year-over-year. Q3 revenue was up 28% versus Q3 last year, reporting KRW 238.4 billion. Financial service accounted for 40% share of total revenue this quarter, sustaining a salient uptrend. Operating profit in Q3 came in at KRW 15.8 billion, recording a triple-digit figure for the first time. Q3 net profit was KRW 19.1 billion, EBITDA KRW 24.1 billion and financial revenue reported KRW 11.8 billion. Next on business metrics. Kakao Pay's daily active user count was up 6% year-on-year, reaching 6.56 million, accounting for 27.8% of MAU, which is 2.5 percentage points higher versus last year's third quarter figure of 25.3%. We see cross usage of wide-ranging services offered on platform and higher user visits leading to stronger user stickiness. Average transaction per user in Q3 was 75, increasing 43% year-on-year. We are seeing balanced growth across payment, MTA, insurance and financial referral services. Q3 ARPU surpassed KRW 10,000 mark following last quarter, reaching KRW 10,103 on the back of top line growth from financial and platform services. Next, CFO, Aidan, will discuss Q3 TPV and other financials.

[Interpreted] Hello. This is Aidan, the CFO. Q3 TPV was up 12% year-on-year, reaching KRW 47 trillion. Revenue TPV was up 8% year-over-year to KRW 13.4 trillion, and payments and money transfer TPV posted a double-digit growth year-over-year, supporting total TPV growth. Payment service TPV increased 14% year-on-year. And against the holiday season, we ran travel-related promotions on hotels and duty-free shopping, which drove online payment TPV up 6% year-over-year. And as good deal service, which we launched early this year, took its footing in the market and an expanded coverage for digital payments and the use of government's cash coupons, offline payment TPV increased 46% year-on-year. During summer high season, demand for cross-border payment by outbound tourists increased, driving cross-border TPV up 16% year-on-year. Revenue from loan service fell year-over-year and Q-on-Q due to stronger government regulation on household loans, but we've been able to minimize the decline through alternative financial product referrals and higher user conversion. Stock trading TPV reached KRW 3.4 trillion, up 2.7x year-over-year. With the boost in stock trading, money transferred to my own account increased with TPV for money transfer going up 13% year-on-year. Outstanding balance for Kakao Pay money account was KRW 2,096.1 billion as of end of Q3, breaking the KRW 2 trillion mark for the first time. Next is operating revenue. Q3 revenue was up 28% year-on-year to KRW 238.4 billion. Financial service posted 72% year-on-year growth and platform service 69%, which drove top line growth, while payment service grew 6%, underpinning total revenue basis. Financial service revenue posted 72% year-on-year growth, reaching KRW 94.7 billion on the back of steep growth from investment and insurance services despite lower loan brokerage revenue following the impact of government's household loan regulation. Payment service saw revenue growth across online, offline and cross-border with total revenue up 6% year-on-year to KRW 129.7 billion. What's noteworthy is offline and cross-border payments, which have greater upside potential, sustaining a double-digit growth trend driving the top line for payment services. We also saw top line uptrends continue for investment and insurance services under our digital finance business. With domestic and overseas stock trading volume growing by more than twofold, investment service revenue increased 155% year-on-year, while insurance service recorded 72% year-over-year growth on the back of stable growth from our core offerings and revenue growth from mid- to longer-term products and increase in insurance DB sales. Platform service saw 69% year-over-year growth, mainly due to top line growth from advertisement and card recommendation services. Q3 operating expense was down 14.9% year-on-year and 2.8% Q-on-Q, reaching KRW 222.5 billion. Marketing expense for the quarter increased 44.6% year-on-year because of reward programs used to expand our offline payment coverage, but nonetheless, is still kept at 10% of revenue. Commissions saw an increase on the back of increase in agency fees following revenue growth from our major services, therefore, rising 9.1% year-on-year. Next is P&L. Q3 consolidated operating profit was KRW 15.8 billion, posting 69% increase Q-on-Q after the turnaround made in the first quarter. Net profit and EBITDA recorded KRW 19.1 billion and KRW 24.1 billion, respectively, recording a double-digit. With the focus on top line growth accompanied with margin improvements, Kakao Pay's profit structure is becoming positively stronger. Underpinned by solid revenue base, we will drive profit-centric growth and continue to expand on the top line of financial subsidiaries and platform so as to strengthen monetization across the company. Q3 separate basis revenue was up 9.6% year-on-year and 2.3% Q-on-Q, reporting KRW 171 billion, sustaining an uptrend. Quarterly operating profit was KRW 9.6 billion with OP margin at 5.6%. Net profit came in at KRW 15.6 billion. Next, we will have Jason run through key highlights of our business for the third quarter.

[Interpreted] Hello. This is Jason. First, on the payment business. Kakao Pay adopted NFC solution to cross-border payments for the first time amongst Korea's digital pay service providers. We've expanded the scope to 150 million Mastercard merchants across the Americas, Europe and Oceania, driving global usage. And based on strategic alliance with Alipay+, we will offer unmatched convenience and benefits to Kakao Pay user base in the overseas markets and solidify our positioning as #1 cross-border payment platform. We will also be offering mini programs to build on a wider range of benefit offerings overseas. Mini program allows for discovery of promotions such as discounts and free gifts at global merchants inside the Kakao Pay app without needing to download locally based applications. We are currently getting things ready for services across more than 20 global markets, including China, Japan, Europe and France and plan to add mini programs across various verticals like hotels, air flights, taxis and trains. Next is on platform services. Based on our quality MyData and payment data, Kakao Pay's platform revenue posted 69% year-on-year growth, becoming a new growth engine for the company. With targeted ads supported by data entering into the growth trajectory, ad service revenue sustained steep growth trend of 88% year-on-year, similar to that of last quarter. Based on MyData analytics, we were able to precisely capture financial needs and preferences of users, driving the evolution of ad services to a higher level of efficiencies. We also cemented our #1 market share status in card recommendation services, reporting high rate of revenue growth of 148% year-over-year. In particular, there was more than 340,000 travel log card issuance on a cumulative basis as Q3 was holiday season with many taking travels overseas. Next, Jeff, who is in charge of services, will discuss AI-related development.

[Interpreted] Hello. This is Jeff. Last October, we opened our second AI service, AI for card and payment benefits in its beta version. It is a service helping individuals spend more wisely, leveraging MyData payment track record on users' preferred brands and buying patterns, recommending the most optimal payment method and payment benefits, both on and offline as well as recommending credit cards that best fit pattern of use, all powered by AI. In the upcoming main version, advice given will be more thorough based on deep dive analysis on spending and card usage habits specific to each user. Second, now let me update you on the work being done to connect with Kakao's Agentic AI platform. Agentic AI platform for Kakao allows for easy connection to wide-ranging new AI services of Kakao without the need for additional resource input. The configuration is agent to agent, ensuring secure privacy and service usage. Right now, Kakao Pay is making preparations to specifically connect with ChatGPT for Kakao and Kanana in KakaoTalk. So in steps or in phases, if you first look at Phase 1, we will be embedding Kakao Pay features in ChatGPT for Kakao. And in Phase 2, we will leverage A2A configuration to connect AI and Kanana. In Phase 3, we developed an architecture using Play MCP to allow Kakao AI service to use data from Kakao Pay. And in Phase 4, we will set up standard payment protocols to build payment agent, thereby completing a closed-loop payment circle housed inside Kakao's agent. It's too early to specify the timing of the launch, but we are carrying forward expeditiously to drive meaningful service outcome by next year. Next, Eddie will walk you through the business performances of Kakao Pay Securities and Insurance.

[Interpreted] Hello. This is Eddie leading our operations. Stock trading volume at Kakao Pay Securities posted explosive growth, driving Q3 operating profit up 3x versus last quarter, coming in at KRW 15.6 billion. Q3 stock trading TPV was up 173% year-on-year to KRW 34 trillion with number of trading growing 337% year-on-year, reaching 140 million transactions. Monthly user count also went up 214% year-on-year, surpassing 1.03 million customers. Not only overseas trading, but domestic TPV also recorded 3-digit growth, sustaining an uptrend in overall performance metrics. Total asset under deposit increased 127% to KRW 7.3 trillion for the same period on the back of rise in stock balance following the uptrend in trading volume. In the third quarter, Pay Security focused on scaling up community-related features, which drove MAU up 2.8x year-on-year and 2x Q-over-Q, reaching 710,000 users. We have also topic-based chat rooms where investment relevant point of interests are offered on top of information on individual stock names, and we have adopted stronger gamification features with profit verify and leaderboards supporting our community users. Having a stronger community-based feature is considered our key growth pillar for security services, and we plan to continue to focus on further upgrades. Next is on Pay Insurance. On the back of top line growth, we've been able to sustain a performance uptrend. And during 2025, we continue to launch new products distinctive to KakaoPay Insurance as we broadened our portfolio and with the growth in the number of new insured users and rise in the share of regular premium income, we were able to grow the size of our business. As such, gross premium written for Q3 was up 38% year-on-year, reporting KRW 16.4 billion. Regular premium products such as mobile phone insurance, driver insurance and insurance for toddlers, children and students have been uptrending with a number of new insured users rising by 20% year-over-year to reach 830,000. Recurring premium, which formed the basis of revenue growth, increased by 5x versus last year, increasing its share by 18.9 percentage points to 26.1% against total premium written. I will now have Allen back to discuss ESG and plans going forward, and then we will wrap up the presentation.

[Interpreted] This is Allen again. Kakao Pay has earned great recognition of its ESG management from global assessment. Kakao Pay is maintaining A rating from MSCI ESG ratings since its first upgrade back in April of '25. We were recognized for expanding financial accessibility to small business operators and for those who are financially vulnerable and for having an excellent human resources development program. Also, Sustainalytics, which is a subsidiary of global investment research firm Morningstar, assessed the company as having low ESG risk in its review, recognizing Kakao Pay's good risk management practices. In terms of shared growth initiatives, in collaboration with Social Solidarity Bank, we raised funds to support digital infrastructure for business owners and small merchants across the nation and ran digital infrastructure campaigns based on the alliance with VAN and POS partners. We also held financial classes and career camp for young adolescents. We hosted Blind Spot Pay School Junior Camp, inviting students from schools in remote areas to close down the regional gap in financial education. We invited 130 students from 4 different schools, and the camp and experience lasted for 3 days covering various topics across finance, jobs, careers and culture. And together with Pay Insurance, we began console and build her project in order to help young adult victims of jeonse housing scam. We ran fundraising to help these victims in their recovery process and supported them with repairs of their homes. Kakao Pay will continue to engage in ESG activities aligned with our business direction to live up to our corporate responsibilities and to open up a sustainable future. I've so far walked through key highlights for Q3 of 2025. Since making a turnaround in consolidated operating profit in the first quarter, Q3 operating profit increased 69.4% Q-on-Q and OP margin for the first time recorded a high single-digit. Kakao Pay has steadily proven its earnings growth capacity and potential, while new growth levers, which we planned for at the beginning of the year, have now taken firm positioning, serving as robust new engine for growth. Despite a big impact from regulation during the third quarter, Financial Service posted 72% growth, underpinned by stepwise growth from investment and insurance businesses, while payment service grew its top line to KRW 130 billion, thanks to a solid uptrend. Platform Service, which is our new business, also posted a year-over-year growth of 69%. In particular, 2025 was a year during which our core strategies of data-powered business development and platform business expansion, which are based on massive user pool and quality traffic have been tested and their potentials have translated into tangible results. I believe this creates a strong basis for us to design next year's plan as well. We will fine-tune innovative ideas in the making as we look forward to 2026, and we'll have an opportunity to share greater detail in our next earnings call. All of the crew at Kakao Pay, myself included, will endeavor to create a better tomorrow and better future using our unrivaled technology, making Kakao Pay a platform where all of the users' daily financial needs are met. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Sinyoung Park from Goldman Sachs.

[Interpreted] I am Park Sinyoung from Goldman Sachs. I would like to ask you 2 questions. The first question relates to your platform business. We see that the numbers in terms of the revenue growth has been quite steep. I would like to understand, going forward, what will be the share of this business against your total revenue base? And with the growth in platform revenue, would it also accompany the same amount of increase in marketing spend? Or with the increase in the top line revenue, would there be a margin improvement, hence, less extent of marketing spend is required. So I would like to gain some color there. Second question has to do with your competitors and peers in the market are quite proactively supplying devices the terminal devices for the payment terminals that is in the offline market. I'm just wondering if -- whether you're not joining in on that competition. And if that is the case, what is your outlook in terms of how this market will go going forward? So basically, my question is, what is your strategy and approach to gain an upper hand in the offline segment of the market?

[Interpreted] Yes. This is Jason. Responding to your first question, as you've mentioned, we've seen across advertisement, card and telecom plan referrals all expand very quickly, driving total platform revenue up by 69% year-over-year. To give you the breakdown, ad revenue was up 88% year-on-year, whilst card referral service was up by 148%. Now platform accounts for about 6% of revenue, which is a rise of 2 percentage points from last year's 4%. It's still a small size, but rate of growth is relatively high. And so its share of total revenue currently is single-digit. We think growth will continue to be quite steep going forward. And Kakao Pay's strength as MyData provider will obviously underpin the model buildup for card and advertisement business, which are efficient and reasonable, and we will be continuously upgrading our business strategy, and we'll be able to sustain a double-digit growth next year. Now we believe that Kakao Pay has a lot of potential in ad business as we are the everyday financial life platform for our users. MyData and payment data is Kakao Pay's competitive edge and priority is to differentiate ourselves by upgrading targeted ads based on these capabilities. In terms of the ad product, we will directly provide user benefits, so users and advertisers can grow together hand-in-hand. And through adtech-linked ads, which is a segment of the ad market that's really growing, we want to strengthen the touch point between users and advertisers through the offering of such benefits. Last but not least, in 2026, by connecting up with various ads network, we will diversify our ad product to adopt new formats and ad creative. Our approach to ad business will be to maximize efficiency based on the traffic and convert growth in [ PV, ] which is fundamental to Kakao Pay as a whole in order to place momentum behind our top line growth. And if we can upgrade personalization and make the link between the users' point of interest and the ad product, we believe we can reduce customer fatigue toward ad impressions while enhancing efficiencies. But marketing spend, obviously, will be required to increase advertisement efficiency for the advertisers and for the user benefit as we leverage adtech linked ads and DA, the display ads. We're also planning on using MyData and AI to personalize recommendations for card and telecom service referrals and expand customers' touch points using AI agents and through the web channels. So we're planning on profit-driven expansion by focusing on the issuances of telecom cards. This approach will ensure growth and keep marketing costs predictable and under control.

[Interpreted] Hello. This is Jeff. Taking your second question, Kakao Pay is #1 offline payment service provider with more than 600,000 merchants and highest PU and TRX metrics among the digital pay operators. Competitor strategy of deploying offline devices is asset heavy, entailing big amount of CapEx, and it has 2 issues. Because its focus is on long-tail merchants, there is limitation on targeting large franchises and not enough revenue can be gained through simply payment fees. Second, there's a risk of triggering competition with legacy infrastructure players like the VANs and the POS companies. On the other hand, Kakao Pay adopts an asset-light strategy, maximizing revenues for merchants and value for users with a focus on digital channel and not the hardware. To users, we deliver ongoing benefits, coupons, good deal offerings, hyper-personalized benefits. And by incorporating table order QR code, ZeroPay and Samsung Pay, we will be driving growth in both number of users and transactions. And to the merchant operators, we will soon deliver marketing tools for them to drive their actual sales growth on top of simple payment tools. We finished our first phase usability enhancement and will speed up release and verification of winning marketing tools in collaboration with Kakao and its affiliates. As such, under a stretch goal, we will continue to expand on PU, TRX transaction status and active merchant base next year as well.