Naver Corp

KRX:035420

Earnings Call Transcript 2023-Q2

[Operator]

[Interpreted] Good morning. Thank you for joining NAVER 2023 Q2 earnings presentation. Joining our call today, we have CEO, Soo-yeon Choi and CFO, Nam-Sun Kim, to walk you through NAVER's business finance and strategies and financial highlights, after which, we will entertain your questions.

Please note that the earnings results are K-IFRS based provided for timing communications and not -- have not yet been audited by an independent auditor and hence are subject to change after such review.

With that, I will now turn it over to our CEO, to present on the business highlights.

[Soo-yeon Choi, executive]

[Interpreted] Good morning. I am Soo-yeon Choi, the CEO. In the first half of 2023, NAVER strategically solidified the foundation of the AI investments made over the past few years and continued efforts to expand monetization of each business segment and carefully control costs to improve profitability.

As a result, NAVER achieved its highest level of operating profit in Q2 on a company-wide basis, driven by Webtoon's reentry into positive EBITDA in Q2 and Poshmark increased adjusted EBITDA compared to the previous quarter.

Going forward, we will continue to mull over and implement the right strategies and initiatives to ensure that the results of these efforts yield significant long-term achievements. Now let me explain where each business stands today and share with you how NAVER's AI capabilities drive the growth of various businesses, including search.

First, I will discuss the search platform business. Despite the ongoing decline in the online advertising market since the second half of last year, the slow recovery of the Korean economy, NAVER initiatives to fortify its platform continued, and as a result, the Search platforms saw a growth of 0.5% year-on-year. Our global search platforms are only recently recovering from a negative growth in the second half of last year. NAVER's search ads maintained a steady growth trend to post a quarterly growth rate of 4% Y-o-Y, following a 5% increase in second half last year to Q1 this year. Smart blocks, which provide customers keyword search results based on user intent, showcase a Q2, high-quality images of local and international landmarks, multimedia blocks, such as short formed as well as our best-selling books, must read books and the fictional characters in diverse Smart Blocks and enhanced search results satisfaction. Technologically to provide our personalized search results for each user, we applied a deep matching, which displays our results based on the user's input and intent.

We expanded the number of Smart Blocks shown per search query and the optimize the search order of Smart Blocks using personalized ranking technology, resulting in a 70% increase in CTR for the results.

In addition, we have newly introduced our paragraph and image paragraph snippets within the UGC blocks, enhancing the ease of content exploration and enabling users to consume more content. Going forward, we plan to leverage Generative AI to predict and provide the next search query as Smart Blocks, further enhancing our search services. On the product side, we utilized machine learning to optimize ad copy by displaying ad features with higher CTR among the additional titles and descriptions provided by advertisers. This led to improved advertiser efficiency and happy effect of expanding the play sets and also third-party media.

Place Ads saw a 92% revenue growth year-on-year, thanks to holidays such as Children's day and Buddha's Birthday, and the resumption of offline activities, improved user experience by the expansion of AI snippets and the integrated search ad discovery feature introduced in Q1.

As of the end of June, the number of paying advertisers increased evenly across all industries, reaching 124,000, a significant growth of 61% compared to the same period last year. Going forward, we will focus on improving local search experiences and enhancing ad matching based on search queries. To ensure relevant ads are well displayed to users aiming to enhance Ad quality and effectiveness.

On the other hand, NAVER continues its efforts to leverage its rich database, advertiser base and also technological capabilities to expand into various platforms. NAVER currently runs its proprietary product TV Ads on other platforms with other user traffic, such as Karrot Market, [indiscernible] and efficiency of the model was further enhanced through improved Ad content, page placements and also advanced keyword matching to better target related markets.

Based on our success in Korea, we plan to apply NAVER Search technology and advertising expertise onto the platforms we have secured in Japan, the U.S. and Europe in the mid- to long term to discover new growth opportunities in the global markets. In the case of display advertising, despite the base effect from last year's local elections, certain industries such as apparel, fashion, health and medical and gaining showed signs of recovery, resulting in a slight improvement compared to the previous quarter. However, the distribution finance and construction sectors continue to face a downward resulting in an overall bearish market.

In this slide, not to facility of the recovery of product sales of the Big Brands, susceptible to economic conditions often used for branding purposes, we introduced premium products at the time voting board in line with the PC main page revamp in late May.

Moreover, in the NAVER's app E section, we tested new full screen Ads with large scale campaigns of well-known brands and receive positive feedback from advertisers. Taking into account the characteristics of product and advertiser industry, so we plan to enhance the branding effect advertisements and officially launched the service. Furthermore, in line with the NAVER's apps revamp schedule in the second half of this year, we will introduce new ad products with high advertising effectiveness and information delivery and explore new Ad inventory for us to drive revenue growth. Next, I will provide an update on our commerce business. Despite the slowdown in the growth of the online shopping market defined by prolonged sluggish consumer sentiment since the beginning of the year, NAVER's commerce GMV in Q2 recorded KRW 11.9 trillion, representing a growth of 14.8% Y-o-Y. Excluding Poshmark, which was consolidated in Q1 the Y-o-Y growth was 8.6%. And while these, the on-platform product GMV, excluding affiliates, amounted to KRW 8.3 trillion, showing a Y-o-Y growth of 19.6%, without Poshmark, the growth was 10.3%.

Meanwhile, the service GMV sold 40.1% Y-o-Y and recorded KRW 1.6 trillion. Part of GMV was buoyed by brand stores as their GMV grew 57% Y-o-Y following the expanded adoption of NAVER's delivery guaranteed service and other commerce solutions. They're increasing their shares in the overall GMV and driving growth.

Service GMV jumped 40.1% Y-o-Y and continue to build expectations for the same growth with rising post-COVID travel transactions. The number of brand stores increased by around 290 Q-o-Q. Steady growth is witnessed in sectors such as digital electronics brands, which take up a big part in GMV as well as lifestyle, food and health categories where the delivery guarantee service proved appealing.

Furthermore, in Q4, we launched the brand tech search, a dedicated search area for a brand product introducing a lounge service or solution which enables brands to operate their exclusive memberships and offer various benefits and events to their members. We plan to release over 80 solutions by the end of the year by further reinforcing our in-house commerce solutions and identifying additional external star solutions.

Through these efforts, we aim to [ second apart ] from smart stores in terms of display and transfer them into a one-of-a-kind D2C platform. The delivery guarantee service offered by NAVER is meeting the demand of both sellers and buyers, resulting in a significant growth in the number of participating vendors and the overall GMV. Compared to Q1, the number of enrolled sellers has increased by 1.7% or 1.7x with around 30% of all brand stores utilizing the delivery guaranteed feature. A significant growth in GMV has been observed, especially in stores actively utilizing the future, resulting in increased revenue and also enhanced brand credibility. This has further strengthened our NAVER Shopping's competitiveness.

In addition, through continuous improvement of recommendation services, shopping GMV generated from AI recommendations accounted for approximately 13% of the total Smart Store GMV as of June. It has also contributed to the expansion of shopping products, CTR. Especially for you, which utilizes AI technology to provide users with optimized shopping information has shown continued success since its launch last year. In Q2, we added customized blocks offering for you content and shopping history based personalized product recommendations and reasons for the recommendation. And our recommendation blocks are suggesting additional shopping interest, thereby providing more tailored and expand the shopping experience.

We expect that the continuous expansion of new personalized shopping Smart Blocks would also contribute to the improvement of CTR for shopping products. Poshmark, which achieved an EBITDA profit earlier than the market expectations in Q1 continued its marketing and operating cost of rationalization and prudent hiring efforts. And further expanded the adjusted EBITDA margin in Q2. Despite the cost of rationalization drive, thanks to a well social-based user base, coupled with a competitive shipping service, Poshmark has expanded its market share within the U.S. fashion resale market, solidifying its position as the leading fashion C2C platform.

This was in contrast to the declining market share of major competitors. Highlighting Poshmark's competitiveness in the North American market. Posh Show, the live commerce service launched last March has been growing rapidly within a short period of time. Also, there are high expectations for the live commerce industry in the North American market and the growth has been fast paced. Therefore, the plan is to further develop Posh Show into a key driver for revenue growth in the future. In July, we launched Posh Lens, which integrates NAVER's Smart Lens based AI image search technology. This provides our users with search results that match or resemble the images that they capture, ultimately increasing purchase to conversion rates. For sellers, we expect it will offer various product exposure opportunities and help them grow.

Furthermore, we plan to introduce NAVER's Search technologies and test measures to improve product discovery and conversion rates. All in all, we will start to maximize synergies by utilizing the NAVER's diverse technologies and services in multiple fronts. The ads are introduced in Q1 were further rolled out in Q2 with 1P seller ad product, and we expect them to grow as a meaningful new revenue source in the future.

Next, let me provide updates on the Fintech business. In Q2, NAVER's Pay TPV recorded KRW 14.6 trillion, representing a Y-o-Y growth of 21.2% and a Q-o-Q growth of 1.2%. Among them, non-captive TPV recorded KRW 6.3 trillion, showing a significant growth of 41% Y-o-Y, driven by the implementation of Samsung Pay MST payment feature, the addition of large new merchants, such as SK stores, Samsung Fire and Marine Insurance, Netflix and the positive performance of shopping and travel booking related industries.

As such, NAVER continues to expand its external ecosystem. With the integration of Samsung Pay MST to NAVER Pay on-site payment, offline TPV increase became prominent starting from Q2 to post KRW 1.4 trillion or twice the amount compared to the same period last year. We will continue to improve usability based on high versatility and further promote on site payments. We're also continuously expanding our financial business, solidifying our position as a financial platform. The recent revamp of the NAVER Pay tab in Q2, which now includes finance, securities and real estate, in addition to existing payments and asset management services has generated significant interest from users. When it comes to expanding our loan service portfolio, the loan conversion service launched in Q2 is now partnerships with 60 companies and offers a wider range of product lineups.

This also contributed to the growth of the credit loan comparison service. Furthermore, the proprietary and personal loan comparison service launched at the end of last year, continues to attract users by providing differentiated convenience and also loan limit search results despite interest rate hike. As part of its efforts to promote inclusive finance, NAVER together with IBK Industrial Bank and Korea Credit Guarantee Fund launched the Smart Store guarantee backed loan for small business owners using nonfinancial information. They were paying money. Hana account launched last year, also secured 1 million additional openable accounts. With it, our deposit protection feature and attractive savings benefits that is expected to contribute to the growth of the new and loyal customer base, especially the MZ generation.

Last but not least, NAVER was newly designated as an innovative financial service provider in the insurance product comparison and recommendation service segments. We will prepare and launch the services in accordance with the relevant regulations. We will continue to expand the NAVER Pay ecosystem by launching various financial product comparison and brokerage services.

Next, let me move on to Webtoon's on Q2 performance. Despite the ongoing challenges posed by the endemic and the drive to improve operational efficiency, global Webtoon's total GMV recorded KRW 444.8 billion, up 8.6% Y-o-Y and 5% Q-o-Q.

In Japan, there was again a significant increase in the proportion of original content in Q2. The number of paid users rose by more than 20% Y-o-Y, thanks to the Golden Week campaign. In the U.S., despite significantly reducing marketing expenses compared to the previous year, ARPPU jumped by more than 20% Y-o-Y and posted a record high GMV continuing the growth trajectory, thanks to service improvements and refined recommendation logic.

Now let me elaborate on this recommendation logic. Currently, AI technology is applied to Webtoon and web novel services in 6 countries, including North America, to offer highly personalized results based on the user's preferred art style. Since its implementation, CTR recommended works across all service areas has shown a significant increase of over 30%.

In Korea, MAU rebounded with the addition of new short-play services such as AI-based twin filter and Webtoon Fortune as well as the introduction of a new content for [indiscernible] Going forward, we plan to roll out these services internationally as well. Furthermore, we strengthened the CRM efforts, the user session length and loyalty have increased, resulting in an expansion of ARPPU and the highest week GMV in our history. In Q2, EBITDA returned to the black ahead of expectations, thanks for efforts to grow revenue, such as expanding advertising and cross-border content, along with various operational efficiency measures, including resource reallocation to core markets, non-strategic asset divestments and workforce optimization.

In Q3, we plan to execute strategic marketing aligned with the peak season of summer vacation to expand our user base. We will strategically maintain the optimal balance between profitability and growth. Webtoon continues to increase the value of original IP through the expansion of creator and user ecosystems and other various activities. For example, one of the major compacts in Korea, Return of the Blossoming Blade achieved a GMV of KRW 1 billion in just 15 days becoming a major hit.

The American serial Lore Olympus has won the Eisner award for 2 consecutive years. The new work I Am the Villain entered the U.S. top 10 charts in its launch week, adding to the build of exceptional local artist IPs.

Furthermore, with Webtoon originals adaptive into videos, such as Bloodhounds and also See You in My 19th Life ranked in Netflix' top 10 series, once again, proving the excellence of our platform IPs.

After the release of the videos, Webtoon GMV increased by 14x and 4x, respectively, showing a strong influx of viewers for the original work. In the second half of the year, there are more than 10 production lineups scheduled in Korea and over 300 products -- projects are in preparation globally. We will continue to leverage our strong story IPs and Global #1 platform and build a robust ecosystem in collaboration with key partners in the production and content market to promote diverse IP projects, including video adaptation, [ MD gains ] and many more. The cloud market in Korea has been affected by economic slowdown and budget constraints in the enterprise sector. In the long term, however, companies are eyeing on the opportunities that digital transformation will bring in the cloud-native environments such as improved productivity backed by AI, greater insights using data analytics and automation.

As a result, we believe the demand in markets for cloud centering on PaaS and SaaS will see a sizable growth. To prepare for such changes, NAVER Cloud is strengthening its capabilities in the past products such as data box, which enhances user experience or convenience based on NAVER's search, shopping and purchase data. At the same time, we are supporting various partners within the cloud ecosystem expanding the solution company ecosystem. Also, we are leveraging NAVER's core competencies to developing new products and improve services. So as to strengthen our fundamentals and eventually to compete effectively in emerging markets. In recent years, NAVER focused on infrastructure investments for our advanced capabilities, development of backbone models to support Generative AI, integration of backbone models into NAVER's own services and various other AI-related initiatives. To ultimately faster a broader AI ecosystem, such AI-related efforts have been progressing smoothly. Today, I'd like to touch upon 4 key priorities.

The first is to establish global level backbone technologies. NAVER plans to unveil a DAM conference slated for August 24, the HyperCLOVA X, the next-generation backbone model for our Generative AI strategies and also CLOVA X, the conversational AI service. CLOVA X is a user-friendly conversational chat platform, but also boasts scalability with a seamless connection with external services through the skill system. We anticipate CLOVA X with various experiments.

The second is to enhance our business and creativity, productivity. I believe one of the areas where Generative AI is expected to make the most contribution is productivity. We are actively working on developing Generative AI solutions for creators, entrepreneurs and sellers within NAVER as well as tools to assist various activities within companies such as collaboration, coding, design and development.

Third, third is to provide customized AI solutions for our customers. Many companies wish to adopt AI, but it is also true that they face challenges due to factors such as cost, security and lack of technical expertise. We have built a diverse lineup of solutions ranging from the skill system that can easily integrate with small sample data to a full fine-tuning model based on dedicated infrastructure in Euro cloud, ensuring physical independence. With this range of offerings, we can provide solutions still to our customers' needs.

In this AI-driven era, where AI is becoming a key competitive factor. We anticipate building collaborative partnerships with numerous companies and governments who may be concerned about losing control over autonomy. Last is to offer new experiences bring next-generation models and NAVER core services are seamlessly integrated, large language models or LLM are remarkable technology, but they are not a magic bullet. We believe that when LLM is integrated with NAVER's rich data and features and use at the right time in place that we can maximize user value.

In this context, though, we are preparing to offer a converged experience in various verticals such as shopping, logo and advertising through our AI-based next-generation service Q. Q is currently under preparation for PC beta launch in coming September. I will talk about its services and future evolution at the coming conference. And today, I would like to share with you why NAVER believes it can offer both users and businesses a new experience.

NAVER is the only platform in the world where consumers can experience their entire journey from discovery and universal search to purchase, booking and ultimately payment, all within one platform. This also means that NAVER has access to an extensive collection of high-quality data unavailable to others. Furthermore, NAVER's unique hyperscale user behavior model which combines a multidimensional preference data such as user search, reviews and purchases with HyperCLOVA X model, we can generate a highly personalized recommendations closely aligned with users' interest lifestyles and life stages and thus offer highly effective advertisements.

As such, NAVER can provide unique values to the consumers even from a global standpoint. NAVER will leverage the rich databases of the various vertical services such as advertising, commerce, local and travel to provide a unique Generative AI experience that only NAVER can offer.

Furthermore, the presence of diverse vertical services within the NAVER platform means that it can fulfill various needs of advertisers all at once. NAVER provides all stages of the consumer journey, including exploration, search and purchase decisions for a single brand purchased on a single platform. Not only that, it is a rare advertising platform that encompasses displays search in commerce. And you can also track conversions from advertising to purchase, making a powerful business channel and partner for advertisers. We're aware that some may have concerns about potential disruptions in the advertising market with the relevant -- with the advance of the era of generative AI. However for NAVER, which provides the entire consumer experience journey from discovery to purchase and even payment, due to the AI, could actually enhance our strengths and offer both NAVER and our business partners greater revenue generation opportunities.

In addition, we worked closely with Seoul National University AI policy initiatives since 2018 and led the way by announcing in 2021, the ethics guidelines. There are many more but unfortunately I am preventive from sharing them all with you today due to limited time.

There are many -- I ask for your kind understanding and stay tuned for more at the DAM conference on August 24.

The conference will all serve as the first ever Investor Day for NAVER since it's founding. We kindly request your active interest and participation of our shareholders.

Next, our CFO, Nam-Sun Kim, will walk you through Q2 financial performance.

[Nam-Sun Kim, executive]

[Interpreted] Good morning. I'm the CFO. I will present Q2 financial results. NAVER's Q2 revenue recorded KRW 2.4 trillion, a 17.7% increase Y-o-Y and a 5.6% growth Q-o-Q. With the effect of Poshmark's inclusion, without the effect of Poshmark inclusion, it grew by 11.7% Y-o-Y. Despite continued external uncertainties of major business sectors such as commerce, Fintech and content, maintain robust growth. The adjusted EBITDA for Q2 excluding the volatility of stock-based compensation and asset depreciation reached KRW 515.1 billion, increasing 19.1% Y-o-Y and 5.5% Q-o-Q. Amid ongoing efforts to optimize our controllable cost items across the company, the adjusted EBITDA for Q2 achieved a history high, driven by Webtoon's positive EBITDA and Poshmark expanded positive earnings. Operating profit increased by 10.9% Y-o-Y and by 12.8% Q-o-Q reaching KRW 372.7 billion. The OP margin also rose by 1 percentage point for the previous quarter, reaching 15.5%.

In Q3, we may experience a slight decline in profitability due to the typical off-season in the advertising market and the strategic expansion of marketing in the content sector with the start of summer vacation. However, we will strive to show gradual improvement in our performance. Moving forward, we will continue to expand the principle of more rational resource allocation. Our goal is to recover and achieve an operating profit margin at or above the level of 2022 by the year 2024. Next, let me discuss revenue by each business area. If you look at Q2 revenue by business, Search platform recorded KRW 910.4 billion, up 0.5% Y-o-Y and 6.9% Q-o-Q. Despite the sluggish online advertising market in Q2, the Search Ad revenue rose 4.3% Y-o-Y driven by improved Ad efficiency through machine learning-based product optimization and robust growth in place partner Ad products, demonstrating the steady growth of NAVER's search business. As was mentioned by our CEO earlier, in contrast to the weakening performance of global search platforms over the past 6 to 12 months, NAVER's search ads have consistently shown growth, never experiencing a downturn. Even in the most challenging macroeconomic environment, our NAVER Search Ad revenue continued to grow at a remarkable rate of 4% to 5% unmatched by its peers.

Display Ad revenue decreased by 9.8% Y-o-Y due to the ongoing economic slowdown and the base of that from the local elections in the previous year. The economic impact is most evident in big brands are premium impression Ads. Which represent the top of the funnel in the advertising market. But retail sectors, including apparel and fashion showed a gradual recovery and the endemic, construction and distribution advertisers have continued to tighten their marketing spending. Such a decline is more likely to be the result of spending costs rather than a structural issue with NAVER's platform.

And it is also expected to bounce back quickly and spending resumes. The commerce revenue recorded KRW 632.9 billion, up 44% Y-o-Y and 4.5% Q-o-Q. Without Poshmark, the revenue posted a growth of 16.2% Y-o-Y and 5% Q-o-Q. By segment, commerce Ads showed 2.5% growth Y-o-Y and 6.1% Q-o-Q, driven by advanced recommendation advertising powered by AI technology despite consumer sentiment downturn and continued marketing cost optimization. Commission and sales revenue jumped 118.3% Y-o-Y and inch up 2.4% Q-o-Q. The inclusion of Poshmark and Brandstore, Travel, KREAM services with higher commission rates contributed to the revenue rise. In particular, KREAM's commission rates rose as much as 8% recently. Rose to as much as it presented recently and expanded its revenue, maintaining its position as a leading premium C2C platform in Korea. Poshmark has displayed above-average growth with a steady increase in its market share in the U.S. fashion e-commerce market. Without, Poshmark, the commissions and sales revenue rose of 33.4% Y-o-Y and 2.6% Q-o-Q. The subscription revenue from membership fees climbed 77.4% Y-o-Y and 8.8% Q-o-Q with the number of subscribers increasing by over 30% compared to the previous year. The Fintech revenue reached KRW 339.7 billion, up 14.9% Y-o-Y and 6.7% Q-o-Q.

Non-captive TPV recorded KRW 6.3 trillion, up as 41% Y-o-Y, leading the overall growth. The offline TPV recorded KRW 1.4 trillion more than doubling compared to the previous year, led by the active on-site payments with the addition of Samsung Pay MST feature and the growth of booking and order payments. Content revenue recorded KRW 420.4 billion, 14.1% Y-o-Y and 2.2% Q-o-Q. Global Webtoon GMV reached KRW 444.8 billion, up 8.6% Y-o-Y and 5% Q-o-Q despite the impact of the endemic [indiscernible] from certain regions. Japan has led the GMV growth with an increase in paid subscribers through the expansion of original and serial works, Korea and North America also experienced growth driven by enhanced data base recommendations and the release of best sellers pushing up ARPPU. Sales revenue also jumped 30.4% Y-o-Y driven by the success of AI profile products within the SNOW camera, which generated new sales.

Cloud revenue remained flat Y-o-Y rising 12.1% Q-o-Q to report KRW 104.5 billion. B2B revenue, in particular, increased 8.2% Y-o-Y and 8.7% Q-o-Q, driven by growth in the public sector sales.

Next is on expense items. Development and operation expenses, including payroll, showed only a limited increase compared to the previous quarter, that continued tight hiring control. As a matter of fact, the consolidated headcount of NAVER decreased by 1.5% Q-o-Q. For Q3, we anticipate a slight increase in payroll, likely less than 1% due to new hires. However, on an annual basis, we expect the cost to be in line with the rationalization plan set earlier in the year. Partner expense increased 4% Q-o-Q due to higher commission fees linked to pay payments and other revenue and jumped 20.2% Y-o-Y due to Webtoon's accounting changes since Q4 2022.

Infrastructure expense increased 7.1% Q-o-Q due to investments in new AI equipment and higher IDC rental expenses. While we extended the useful life of servers and equipment and the G&A period in Q1, in line with the global trend. And this helped to keep it to the same level as the previous year. In the second half of the year, we will continue to invest in new AI equipment at an appropriate level as we launched AI models and services such as HyperCLOVA X and Q. Please understand that it is difficult to predict the scale of inference related costs as the service has not yet been launched. We will carefully monitor user behavior and user volume to develop appropriate billing policies and monetization strategies in the future.

As mentioned in Q1, this year's total CapEx is expected to decrease slightly compared to the previous year despite additional GPU expenses for enhancing AI capabilities. We plan to manage the costs so that CapEx to revenue ratio stays below 7% for this year as well as next.

Lastly, marketing expenses increased 15.1% Y-o-Y and 1.6% Q-o-Q, primarily driven by the growth in payment rewards due to increased TPV and the expansion of overseas marketing efforts in the content segment. Without Poshmark, our marketing expenses remained at similar levels to the same period last year. Next, let me discuss the P&L by segment. First, the combined segment margin of Search platform and commerce dipped slightly Q-o-Q primarily because of the high growth in external media advertising and the Search platform, which has a relatively lower contribution margin. The commerce margin rose 0.7 percentage points Q-o-Q, mainly due to KREAM and Poshmark improved profitability.

Fintech margin decreased slightly due to strategic marketing expenses aligned with the peak consumption season, such as the family month [indiscernible] compared to the same period last year. When it comes to content efforts to expand monetization and cut marketing expenses to enhance operational efficiency helping to reduce our losses by nearly KRW 15 billion compared to the previous quarter. Webtoon's operating loss improved by around KRW 26 billion Y-o-Y, recording a deficit of KRW 15 billion. This is the result of achieving positive adjusted EBITDA earlier than planned. Webtoon indeed posted a positive EBITDA for the first time in 3 years. We streamlined our marketing expenses by cutting the expending raised during the pandemic period in line with the extraordinary increase in online content consumption, works on payroll and OpEx rationalization and divested domestic loss marketing for this.

In Q3, however, we plan to strategically expand our marketing spending and to acquire more users while carefully maintaining the optimal balance between profitability and growth. Now in its affiliates, services have been reducing its deficit through efforts to expand monetization such as AI products for cameras and increasing paid subscribers as well as cost-saving measures in marketing. In the second half of the year, we plan to continue optimizing NAVER's business portfolio, including narrowing the deficit of SNOW from the perspective of appropriate capital allocation across the entire company. Without the impact of the decreased stock-based compensation expenses, cost loss in Q2 narrowed slightly compared to the previous quarter due to the integration of Korean and Japanese technology businesses to strengthen the B2B business.

Consolidated net profit in Q2 surged Y-o-Y and Q-o-Q to record KRW 26.7 billion, mainly due to the expansion of equity method valuation gains and gains from the disposal of certain consolidated subsidiaries into free cash flow decreased by KRW 25 billion Q-o-Q.

This decrease was attributed to an increase in the cash outflow due to corporate tax payments. Despite the increase in adjusted EBITDA, a total of $800 million in loans were taken out for the acquisition of Poshmark in January of this year. However, during the first half of the year, a cumulative amount of $400 million was repaid, resulting in a significant decrease in the outstanding loan balance.

In addition, since the second half of the year, we have been rebalancing our noncore investment asset portfolio, including direct and indirect clients, investment stack and beneficiary certificates. So far, we have liquidated approximately KRW 400 billion worth of assets. And by the end of the year, we aim to sell an additional KRW 400 billion worth assets totaling around KRW 800 billion.

Finally, I will discuss our cash dividends. So according to the shareholder return plan announced in Q1, the resolution for cash dividends for the 2022 fiscal year was passed during the Board meeting in August. The plans to pay cash dividends of approximately KRW 62.4 billion, which is around 15% of the average 2-year consolidated FCF to shareholders at the end of August. The dividends will be distributed to shareholders based on their ownership as of the end of June.

As mentioned before, the payout ratio was decided at 15%, taking into account the target year-end debt ratio to maintain our credit rating and the appropriate liquidity level needed to respond to macroeconomic uncertainties. Furthermore, we plan to improve the dividend payout process so that the shareholders eligible for dividends that can be determined after the dividend amount has been finalized. However since the change of -- to the dividend [indiscernible] requires an amendment to the articles of incorporation, we plan to propose this as an agenda item for the next year's shareholders' meeting. The treasury stocks that we have decided to retire at a rate of 1% annually over the next 3 years, we plan to proceed with the retirement plan. This ends the Q2 financial performance update. We will now take your questions.

[Operator]

[Interpreted] [Operator Instructions] The first question will be presented by Eric Cha from Goldman Sachs.

[Minuh Cha, analyst]

[Interpreted] I would like to ask 2 questions. First question is that I understand that it will not be easy for you to provide us with that I guess, an accurate outlook, but I would like to get some color as to what the executive views are regarding the advertisement environment and the outlook for the second half of the year? And what do you project to be -- will be the revenue from Search platform business of NAVER? Second question is what would be the focus of the revamping or the refreshing of the NAVER app going forward? Would the focus be on streamlining the user interface? Or would you focus more on bringing up the engagement? And I think in this process, short form will play quite an important role. I would like to understand as to what your view is when it comes to the creator's perspective, what is the value proposition that the short form will provide them?

[Nam-Sun Kim, executive]

[Interpreted] This is the CFO. I will respond to your first question, and then I'll hand it over to our CEO to answer the other question. You asked about what our projection is going forward in the second half of the year. We believe that we will be able to continue on with the growth rate that we've seen during the first half of the year in light of the fact that the -- there's been -- there's a seasonality factor that is involved. If you look at the performance up to date when it comes to our Search platform business, we've been able to maintain our growth rate at a low single digit, we expect that level will be able to be sustained as we go into Q3 and Q4 as well.

And also for the fourth quarter, although cautious, we do project that there could be economic slight rebound and once that takes place, we will be able to expect to see even although marginal, some rebound in our display Ad. So once again, we think the growth rate for the second half of the year will be quite flat on -- compared to the first half.

[Soo-yeon Choi, executive]

[Interpreted] This is the CEO responding to your question about where our focus is when it comes to revamping the NAVER app. Basically, our focus is to further bolstering user engagement. Based upon people's behavior when it comes to consuming content on the NAVER platform. Basically, we are very much focused on providing an experience where they could receive personalized and customized recommended feed which will be determined based on the users' various different types of interest as well as the consumption behavior with regards to the search and the click track record.

We want to be able to also provide additional opportunities for the users to make use of our shopping and places, which will help them discover their interest.

But of course, that does not mean that we will not look at the UI and the UX aspect. We will continuously make improvements on our user interface, so they could be much more conveniently used by our users which could also trigger additional consumption of the content. And as we enter into the second half of the year, we are expecting a slight rebound in the economic cycle, and once that time comes, advertisers will be able to spend a little more in their marketing and ad spending. So we will, at NAVER do our utmost to make sure that we solidify NAVER as the most optimal advertisement platform.

Now regarding the value proposition on the short forms, we believe that through these creators created short forms, we will provide a solution whereby people could really experience a uniform and streamlined across the whole cycle of purchasing, making bookings and up until writing reviews. And especially in the NAVER's main segment or the main screen by providing the impression of the short-form content, we expect that the users will be able to -- or the creators will be able to experience a very unique traffic, which they have not been able to experience in the past and we are also looking at various ways for us to revenue share together with the creators. And also in this process or through the short-form content, I believe that they will be able -- we will be able to provide appropriate services that had not been experienced by the creators, especially various different types of long form, I guess, long-tail companies.

[Operator]

[Interpreted] The next question will be present by [indiscernible] securities.

[Unknown Analyst]

[Interpreted] I would like to post 2 questions. First, I would like to get some color as to what were the impacts of adopting solutions to your commerce business for instance, in terms of the customer lock-ins, the market share and the take rate increase? And also, what would be your mid- to long-term strategy or direction forward? Second question is on your AI. I would like to understand as to what changes your user base will start to experience in terms of AI-powered search and commerce? And what outcomes do you foresee? It's potential impact on the overall traffic improvement and your financial impact?

[Soo-yeon Choi, executive]

[Interpreted] This is the CEO responding to your question about the commerce solution and some of the improvements that we've seen in the overall metrics but at this point, we are still in the midst of implementing the strategies and also further scaling up these solutions. So it's hard to give you a definitive answer so please understand that I won't be able to provide you with a specific number behind these improvements in our metrics. Now having said that, about 100,000 Smartstore sellers are currently making use of the services and even if we migrated to a paying model, we are still seeing a good retention. And so in the second half of the year, we plan on providing more diverse solutions. Regarding AI, I did mention this in quite a bit of a length during the presentation. But aside from search, we have many different verticals, for instance, commerce, local and travel. And once -- all of these verticals are powered by AI technology. We will be able to better satisfy the needs of our consumers.

And also be able to have a superior capability in interpreting the search prompts that the users actually use. As a result, we believe that in each of these verticals, we will be able to significantly enhance the performance when it comes to user search or retrieval or their decision to make a purchase. So we'll be able to influence that much better compared to the past. And also already for advertisement and for travel segments, we have adopted AI technology to a certain extent.

Yes, we're focusing on innovating the user behavior, user experience. But what is also important is the experience of the producers, the advertisers, the sellers. We will be able to significantly, we believe, enhance their experience during this journey. Because we have access to the data that the users generate during their product search phase and search rate and exploration phase as well as the purchase-related data, we will be able to interpret those data in the most optimal way based on which we will be able to curate the advertisement and provide recommendations when it comes travel products or other merchandisers.

So all in all, Generative AI is going to work to further strengthen NAVER's competitive edge. And in so doing, it will have a very positive impact on many different metrics, including traffic.

[Operator]

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

[Seungjoo Ro, analyst]

[Interpreted] I see that the biggest contributor behind your annual OP growth was the profitability that you were able to drive from your content business. But looking at your Webtoon business, its growth rate is still a single digit. So it seems you are overly focused on the bottom line, the profitability aspect. So can you provide us with a breakdown as to what the percentage of each of the geographical markets are in terms of the GMV, looking at Korea overseas, including Japan and U.S. And how are the growth rates differ across these different countries?

Second, does the company still have plans to list your Webtoon business in the U.S. If that is the case, even if it requires spending, would you then focus on continuously attracting more users and more artists. And would you -- should that -- would that mean then you should further increase your global GMV?

[Nam-Sun Kim, executive]

[Interpreted] I will respond to your question about Webtoon. During the pandemic, a lot of Internet companies, platform-based companies had experienced significant erosion and their cost efficiencies. So for us, what we really focused on was to separate between the investments that would give us ROI and the spending or all the investments that will not give us an ROI. So we made that very clear distinction, and we have made our allocations in a very efficient manner. So we have adjusted the structure to enable that. So what our approach is that we're not saying that we're not going to not invest in any investment even if it brings us a good ROI. We have been able to really downsize on the ROI that does not give us any return, but still continue on to invest.

So in Q3, we will continue to make investments into effective marketing means and will also make appropriate investments that require for our operational purposes. In terms of the GMV breakdown across different countries, we don't provide that quarterly breakdown information. But if you consider the growth rate that you've seen more or less, you'll be able to get some feel as to what the mix looks like. Japan actually accounts for half of this GMV and Korea above about 30%, and then the rest is taken up by North America and other countries. For growth rate, Japan has the best growth rate, above slightly 10%, and then there's North America that follows Japan at around 10% as well.

Regarding the plan to be listed, yes, we are continuously progressing with that preparation and we're preparing to -- we are continuously preparing into that up until next year as well. And as you've mentioned, the global GMV growth, of course, that is important, but that does not mean that we will just recklessly spend money to drive that growth. We will focus on scaling up the level of services. And at the same time, for the Webtoons, the advertisement of revenue.

At this point, we're quite passive in terms of playing on that monetization opportunity. We believe there is quite a bit of a big potential going forward for monetization relating to the ad revenue in Webtoon. So aside from the in-app purchases, we believe that there is a big upside for advertisement revenue from Webtoon. So it is not just the traffic or it's not just -- so based on that -- because currently, there is a lot of aspects of the traffic that is not being leveraged for monetization. So it's not just a GMV, but we still see there's a big upside in terms of top line revenue.

[Operator]

[Interpreted] The next question will be presented by Susie Lee from Merrill Lynch Securities.

[Susie Lee, analyst]

[Interpreted] I know that the CEO provided us with very detailed explanation before, but I just want to ask some more questions relating to your AI initiative. You've been preparing for AI over a long period of time, just like your global tech peers. But where as your global IT companies have received benefit through re-ratings of their stock prices, NAVER yet hasn't. Would like to know as to what -- how much of an earning upside do you expect from this AI-powered business? And if you could give us the breakdown between revenue and cost impact, that would be helpful. especially if you look at B2C business, I think the AI technologies will further drive and have positive impact on your ad revenue growth. Would that mean that you will be able to further adjust your Search platform business revenue guidance going forward. And for B2B, you could probably envision some of the subscription model.

And I wonder whether that is the case. And on the cost side, there seems to be some -- a bit of a bias that if the number of population of the nation is not big enough, then the cost and the investment that goes into AI is not really going to translate into a good profit. I know even -- maybe not at a granular level, can you at least provide us with some overall color as to what your assessment is in terms of cost versus benefit?

[Soo-yeon Choi, executive]

[Interpreted] Just to tackle your question just briefly, NAVER actually was a company that from very early on, made investment into the LLM, the large language model, and I think even based upon the global standard, I think we were third in line to make that investment. The reason why it's not yet been reflected in the ratings or the equity prices of the company is because we have not yet been able to showcase to the world the sophisticated level or the scaling up of the ChatGPT 3.5 or 0 and the strategies that we have. So I think from August 24, after that, we will be able to provide you with a more detailed explanation regarding our strategy, the product as well as the business model and will implement based upon those plans.

Now regarding B2C, because we are a search engine service company, if we were to adopt a large language model to the services, we will be able to better interpret the queries that the search quarries that the users enter and also be able to better summarize the responses and really link it up interlocked with all the internal services that NAVER provides. Once that happened, we believe that we will be able to further enhance user experience, which will then translate into a positive impact on our advertisement revenue as well as service satisfaction. But having said that, it is still too premature for us to provide you with the specifics to the extent that we adjust our guidance.

In terms of B2B, we think that we will be able to gain revenue impact much earlier compared to the other domain B2C. So we are focusing on that aspect. As you've mentioned, subscription is one model that we are considering an API-based billing and monetization, of course, is going to be an effective way. In this B2B area, we will focus more on collaborating with the industry, the companies. We will make use of the new cloud capabilities that we have and link up with the existing industries. And I think that will provide us with an earlier revenue or any performance impact.

[Nam-Sun Kim, executive]

[Interpreted] If I may further elaborate regarding the upside potential from commercializing the AI technology cost versus benefit, I can tell you that there is no company in this world who could actually give you that quantified figure, maybe except for one company that is currently providing a packaged software, there is no other company, I'm sure you could appreciate, we'll be able to provide you with that quantifiable figure. Well, then having said that then, what is the size of the upside, if we look at this from our organic business, NAVER basically provides advertisement and commerce opportunities and which all starts with our search business. And if you assume that our advertisers are able to bump up their ROAS by about 5 percentage points, then that would, of course, have an impact on our NAVER's profitability and our financial performance. based upon a couple of number of assumptions that you can also probably think of, I think you will be able to make an appropriate projection going forward from there.

Yes, looking at the B2B model, I think that some people are concerned about the possibility that if a company makes too big of an upfront investment, and market isn't there. The size of the market is too small, then would the company not be able to recover that investment. But I think this concern arises from a lack of understanding on the commercialization of these different AI solutions, including GPT or be it a subscription model. None of the companies are -- have adopted a business model where they're looking to make investment and recover that investment through this AI solutions.

These are all equipment-related expenses, so they are variable costs. So obviously, through a subscription pricing model, the price would eventually be -- have to be transferred. There should be a pass-through mechanism for these investment costs. So for example, like you probably know of Copilot GPT. That is the case in point as well. So we have no intention to generate losses in light of the fact that these are the variable costs. That is not the business model that is inherent in these AI solutions business.

[Operator]

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

[Stanley Yang, analyst]

[Interpreted] On AI investment. I just have a follow-up on AI investment. I would like to understand the scope of that AI investment. It would include labor costs and CapEx. And what has been the trend in, for instance, labor cost last year, this year and your projection next year also for CapEx. You talk about equipment investment, what is going to be the trend like past and future. And when you make these equipment investments, you will first capitalize them and recognize them as expenses and cost over a certain period of time. What is that period? And also for AI cost burden, I could really see that the executives are really putting an effort to control the cost burden and make it more efficient. So if you give us a number to this, that will be helpful for us in analyzing and understanding. And if you look at your past endeavors with Japan line, you've made -- you've done co-development. Of course, that was the previous version of CLOVA. If you do these types of joint development, does that really help you in AI cost making that more efficient?

[Nam-Sun Kim, executive]

[Interpreted] In terms of the total capital spending. On a cumulative basis for our AI initiative, we've started back in 2017. We started hiring AI talent. We've been developing AI models since then. And then in 2020 and 2021 as we move into developing HyperCLOVA with more than 100 billion parameters. So all of this take in account on a cumulative basis with more than KRW 1 trillion. And then per year basis, looking at our AI CLOVA organization, we basically spend about KRW 150 billion on a per year basis to the workforce. And then for CapEx, you'll probably know these numbers, but our infrastructure will be above KRW 300 billion. And since 2021, we've been making investments in buying up graphic GPU, and so that -- in buying new GPU, so that would have consumed about KRW 150 billion annually.

And then moving to the depreciation period for the equipment. We told you previously that it's a 5-year period depreciation. And we've made quite a bit of significant number of GPU purchases in the past. Spending about KRW 150 billion on a yearly basis. So for next year, we expect that, that level of purchase for GPU requirement is going to be much lower. And so the investments that's going to take place in the future will not be as big as what we've seen this year and the previous year. We have the GPUs and the chips that in place to develop the current models that we are working on.

When it comes to the sizing of the AI investment, I think a good reference point for you would be a North American-based company whose revenue is 3x bigger than NAVER. They already have an AI-based LLM solution and making -- they have already monetized from this model. So if you were to compare NAVER, equipment, CapEx and labor costs and R&D costs all put together and compare it to this other company, you will be able to find that the level of investment that we are making is not excessive nor is it lacking. So they can tell you that we are making a sound level of investment.

[Unknown Executive]

[Interpreted] Yes, due to lack of time, we will take the final question.

[Operator]

[Interpreted] The last question will be presented by Seyon Park by Morgan Stanley.

[Seyon Park, analyst]

[Interpreted] My final question is on commerce. So excluding Poshmark, the, I guess, GMV growth was about 9% I see that for the brandstore, the verticals, the other KREAM vertical -- KREAM, for instance, are posting a higher growth. So the reason why these outlets or the smart store, the growth rate is below about 9%. Is it because of the competitive pressure? I know that coupon is really exiting quite a bit of pressure. They are quite aggressive. So you also seem to plan -- you also seem to be planning to place momentum behind your brand store and B2B segment. So basically, my question is, what will be your strategy for the second half of the year? And also if you implement those strategies, would we be able to see a further growth in your GMV?

[Soo-yeon Choi, executive]

[Interpreted] Yes. As I mentioned at the very beginning, there has been an overall economic slowdown. And because of the slowdown in the e-commerce growth rate as well as the monetization movement that we are seeing from our partnered or affiliated malls that may look like it had driven down our GMV. But if you look at our vertical services, meaning the on-platform services, the GMV growth has been quite robust at about 19.6% year-over-year.

And I think another aspect of your question had to do with the overall competitive landscape, particularly vis-a-vis coupon. NAVER's key -- some of the weaknesses that people have pointed was our delivery capabilities versus coupon. In order for us to overcome that, we have introduced the delivery guarantee service which we believe had really driven a meaningful revenue upside potential. And also, currently, Sunday delivery is under test and the feedback that we are getting, the responses have been quite positive to date.

So once we complete that testing phase, we would then decide as to whether we will formally adopt the service. So despite the fact that we are taking on a light asset-based approach, we will be able to enhance our competitiveness and also leverage all the strong capabilities that NAVER has in terms of its membership programs as well as branded store base B2C services, live commerce and bringing of AI solutions. Through this, we believe that we will be able to further improve and drive up shopping and smart store competitiveness.

So NAVER shopping is all about the entire journey from searching to shopping to making payments and then coming back to that whole repurchase. So we offer a very flexible flow of the shopping experience. And once we bring AI technology to this flow, we would be able to maximize the benefit. However, all those essence we -- NAVER started off as a search engine application, there were some feedback that our convenience when it comes to the shopping experience like personalized recommendations have been weak compared to some of our peers. But in the second half of the year, we have an upcoming facelift on the UI of the shopping main, the main shopping screen and as that where the shopping services are being provided? And once we have that refreshing or the revamping of the user interface, we will be able to enhance our competitiveness in the shopping business. And once that happens, it will have a positive impact on our GMV trajectory as well. And we will be able to, we believe, further increase the market share in the market in the greater market, although in the second half, we think the overall market growth rate would be quite flat. We hope to be able to further the GMV growth versus market average.

[Operator]

[Interpreted] Well, thank you very much. This brings us to the end of the second quarter 2023 earnings presentation. Thank you to investors for joining us this morning, and we ask for your continued support and interest.

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