Naver Corp

KRX:035420

Earnings Call Analysis

NAVER Reports Solid Revenue Growth and Expands AI Capabilities

In Q2, NAVER recorded KRW 2.61 trillion in revenue, up 8.4% year-over-year, with a notable 23.9% increase in adjusted EBITDA to KRW 638.4 billion. The search platform drove growth, with revenue rising 7.5% to KRW 978.4 billion. Strong performance in display ads contributed to a 6.1% growth in search revenue. NAVER anticipates double-digit top-line growth driven by robust AI innovations and the introduction of new products. The company aims for a seamless integration of AI across services to enhance user engagement, targeting a revenue boost through strategic advertising enhancements and e-commerce expansion.

Strong Financial Performance in Q2

In the second quarter, NAVER reported remarkable financial growth, with total revenue reaching KRW 2.61 trillion, a notable increase of 8.4% year-over-year (Y-o-Y) and 3.3% quarter-over-quarter (Q-o-Q). Adjusted EBITDA, which excludes stock-based compensation and depreciation, climbed 23.9% Y-o-Y to KRW 638.4 billion, reflecting efficient cost management and a recovery in the search platform. The EBITDA margin grew to 24.5%, up 3.1 percentage points from the previous year. Additionally, the operating profit (OP) margin rose to 18.1%, marking an increase of 2.6 percentage points Y-o-Y, indicating sustained profitability amid strategic enhancements.

Growth in Core Business Segments

The company's diverse business segments contributed significantly to its revenue expansion. The search platform generated KRW 978.4 billion, up 7.5% Y-o-Y. Key drivers included a 6.1% rise in search ad revenue due to enhanced bidding options and improved targeting. Display ad revenue surged by 16.1% Q-o-Q, driven by new product launches and strategic performance ads. Meanwhile, commerce revenue climbed 13.6% Y-o-Y, supported by a robust demand for brand solutions and an effective marketing strategy.

AI Investment Fuels Future Growth

NAVER's investment in artificial intelligence (AI) is expected to drive further growth across various sectors. The company is focused on integrating AI with its core services to improve user experience and operational efficiency. For instance, advertising efficiency saw a significant boost, with conversion rates increasing by 23% due to AI-enhanced tools. CEO Soo-yeon Choi expressed confidence in achieving double-digit growth over the next three to five years, primarily through continuous AI advancements and product enhancements.

Looking Ahead to H2 and Beyond

As navigation into the latter half of the year approaches, NAVER anticipates ongoing revenue growth driven by several strategic initiatives. The company plans to enhance its advertisement capabilities and expand into new markets, while growing its content offerings such as Webtoons. They aim to solidify existing relationships and explore new partnerships in AI-driven commerce, signaling a robust roadmap for sustained growth.

Sustainability Initiatives and Corporate Strategy

NAVER is also committed to long-term sustainability, aiming for a carbon-negative status by 2040. As part of this initiative, the company has achieved over 50% renewable energy usage in its operations. This focus on sustainability, coupled with strategic investment in AI and digital platforms, positions NAVER well for the evolving digital landscape and enhances its corporate reputation.

Adapting to Market Conditions and Challenges

Market conditions remain somewhat volatile, influenced by macroeconomic factors such as inflation and interest rate fluctuations. Nevertheless, NAVER's management has outlined strategies to navigate these challenges, including optimizing marketing expenditures and adopting agile approaches to enhance user engagement. Their adaptive strategy should help mitigate risk while capitalizing on emerging opportunities within the e-commerce and digital advertising sectors.

Key Financial Metrics and Future Guidance

Looking forward, NAVER is optimistic about maintaining its growth trajectory. The CFO highlighted a stable outlook with improved debt metrics, as the adjusted debt-to-EBITDA ratio decreased from 2.2x to 1.8x within a year. Additional guidance for Q3 suggests continued revenue growth across core sectors, with expectations to capitalize on AI and e-commerce. NAVER's ability to innovate and adapt will be critical for sustaining its competitive advantage.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. We will now begin NAVER's 2024 Q2 Earnings Conference Call. [Operator Instructions]

[Unknown Executive]

Good morning. I would like to thank the analysts and investors for joining NAVER's 2024 Q2 earnings presentation. I would like to thank everyone for joining us.

As always, we have CEO, Soo-yeon Choi; and CFO, Nam-Sun Kim joining us on our call today to walk you through NAVER's business highlights and strategies and financial highlights, after which we will take your questions.

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

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

[Soo-yeon Choi, executive]

Good morning, I'm Soo-yeon Choi, the CEO. In the Q2, NAVER focused on strengthening its platform capabilities by integrating its core competencies in AI, data and search to provide differentiated experiences for users, creators and partners within the NAVER ecosystem. This approach yielded success not only in service delivery, but also in monetization.

In Q2, search platform revenue increased by 7.5% Y-o-Y to KRW 978.4 billion. Search revenue grew by 6.1% Y-o-Y due to the expanded introduction of competitive bidding in Place ads and improvement in [ Carling ] exposure and targeting. Display revenue was increased by 8.1% Y-o-Y, driven by the success of new ad products and -- such as home feed ads and also performance ads.

On the service front, so we are focusing on increasing user time spend and generating new revenue technology within the NAVER app. The daily average number of visitors to home feed which -- [ recommended ] are based on individual interests, did a record high in June and is rapidly growing as one of NAVER's key services. In particular, the proportion of users aged between 10 to 30 is close to 4%, contributing to the increased usage for the year.

We plan to conduct [ UI ] improvement tests to attract new users and increase incoming traffic. In addition, we will introduce a new exploration feed that facilitates quick browsing and [ change ] discovery through image-centric content. For [ clip ], the monthly average daily [ clip ] count surpassed 50 million as of June, demonstrating steady expansion of the user base. In addition, the production of clips recommended in the home feed and Clips app has grown more than 3 times daily, indicating a continuous expansion of the clip ecosystem.

In Q2 or the second half, we plan to recruit the third batch of [ K-Pop ] creators, expanding the number of categories to [ 25 ] to better cater to users' detailed preferences.

Furthermore, to enhance synergy with existing NAVER services and search, we are working on strengthening the integration with shopping using the sticker feature within clip and encouraging the production of clips with in-place reviews through clip editor integration. As a result, by the end of Q2, the average daily time spent on the NAVER app main screen has grown by 30% compared to the same period of last year, recovering to pre-social distancing levels.

Moving forward, we plan to continue improving existing services and launching new ones to provide search, shopping and feed type of content [ tailored ] to user needs, either by creating an environment where users can stay engaged within NAVER continuously. We're also taking proactive [ sales ] to quickly secure transient personalized content tailored to individual user preferences.

In April, we structured -- we restructured the organization to consolidate previously dispersed content production and management teams. Also, we're rolling out various creator, training and [ rural ] programs to encourage high-quality content production.

The photo [ dump ] challenge was started in -- which was started in June has become a fresh way for millennials and Gen Zs to express themselves with participants in their teens [ upto ] 30s, accounting for 8% of the total. The user-generated content, primarily images, produced from this challenge is naturally being featured on the home feed, which has led to an increase in creator earnings. In fact, the highest earning progress compensation has seen a significant rise up to 10 times compared to pre-home feed launch. Many bloggers having seen the potential for [Indiscernible] generation have started participating as quick creators, strengthening the unique creator ecosystem of NAVER.

Content produced with NAVER is recommended across various services such as search, shopping, places and maps through AI, providing a satisfying search experience for both creators and users. This also creates revenue opportunities for NAVER. We are implementing various measures to strengthen the competitiveness of our advertising platform. The gradual expansion of fee services and the introduction of new popular services like clip and [ CBT ] have increased traffic and user time spent, securing new advertising spaces.

To enhance the value of this increased inventory, we are continuously launching highly effective advertising products and improving our efficiency through sophisticated AI-based target team.

Feed ads are demonstrating their efficiency by achieving higher CTR and conversion rates compared to regular ads, thanks to enhanced targeting. In particular, dynamic -- NAVER dynamic ads, which display AI-based personalized ads based on user shopping data, that's exemplified how the NAVER platform effectively leverages its strength from discovery to conversion.

These ads show high click-through and conversion rates due to strengthened retargeting to be nearly 3 times higher CTR and [ ROAs ] compared to other feed ads. The ads received positive feedback from both advertisers and users, leading to an increase in the number of paying advertisers and subsequently boosting revenue.

Starting in the second half of the year, we plan to further enhance our advertiser tools with a focus on optimization and automation using AI to develop a more convenient advertising platform. We will use our data generated from advertiser sites to optimize campaign budgets and we find [ the ] functions to target the right audiences.

In addition, we plan to enhance NAVER's advertising platform capabilities by enabling bulk registration of responsive [ creatives ] and providing automatic bidding features tailored to specific objectives, thereby [ followed ] by NAVER's position as a useful and attractive platform for both users and advertisers.

Next, I will provide an update on our commerce business. In Q2, NAVER's total commerce GMV grew by 4.1% Y-o-Y, reaching KRW 12.3 trillion. GMV excluding outlink marketplaces saw a 7.6% Y-o-Y, driven by the continued growth of Brandstore and Service [ segment ]. Brandstores continues to cement its position as a new marketing channel by offering seller tools, data and marketing spaces through the Brand Solution package.

Both the number of registered brands and GMV saw a steady growth with an increasing number of consumers seeking reliable brands. In particular, the Delivery [ Guarantee ] services, which is expanding around Brandstores has had a positive impact on GMV. Sellers using the Delivery [ Guarantee ] service saw approximately 21% higher GMV compared to those who don't.

Moving forward, we plan to expand our database for a complete coverage through efforts such as increasing fulfillment centers and providing standard pricing. In Q2, Brandstores maintained strong growth across all categories with notable increases in GMV driven by major brands, in particular, in the furniture, interior, fashion, and food segment. Furthermore, the introduction of Sunday delivery and same-day delivery in April for faster shipping, the launch of free returns and exchanges for Delivery [ Guarantee ] products in May significantly improved in convenience for both sellers and consumers and contributed to the continued growth of Brandstores.

NAVER Plus membership also contributed to the expansion of overall customers by offering users a tangible value. The membership features a customer from the structure allowing users to earn more rewards the more they use the service, also by partnering with various content providers and offline ecosystems, it provides greater value to customers. As a result, the paid membership subscription retention rate has reached 95%. Moving forward, we will plan to continuously attract [ more ] customers and users through the Plus membership and further expanding NAVER's [Indiscernible] commerce ecosystem.

On the service side, the growth has slightly slowed compared to the previous quarter due to the post-pandemic base effect and weakened [Indiscernible] spending driven by rising inflation and interest rates. Nevertheless, by enhancing reservation platform features and expanding into new sectors by mobility, we continue to achieve a robust growth, surpassing market averages. Despite the impact of high interest rates or inflation and intensified competition in the U.S. retail market, Poshmark achieved a positive operating profit in Q2. In terms of revenue, both advertising and Posh [Indiscernible] have received a strong response.

Looking ahead, we aim to position Poshmark as a distinct platform compared to its competitors by enhancing [ cost plans ], improving the search engine and launching new services.

Finally, just as the feed service introduced in the NAVER app helps users explore and discover new content, we're preparing to bring similar innovations to our commerce. Moving beyond traditional price comparison services, [ be ] solely on the lowest prices. We aim to leverage NAVER's unique data and AI technologies to offer a more differentiated and personalized shopping experiences in Smart Stores in the second half of the year.

We plan to introduce personalized benefits and recommendation features in feed format to streamline the shopping journey, making it easier for consumers to discover their desired brands and products. In addition, we will provide an intuitive interface for exploring Smart Store products, ensuring a trustworthy shopping experience for our customers. Moving forward, NAVER shopping will continue to focus on multiple initiatives to create a seamless flywheel that allows customers to explore, discover and purchase a wide range of reliable products more easily.

Next, allow me to provide an update on our Fintech business. In Q2, NAVER Pay's TPV reached KRW 17.5 trillion, marking a 20.1% increase Y-o-Y and a 5.2% increase Q-o-Q. Non-captive TPV driven by the ongoing expansion of our third-party ecosystem increased to 40% Y-o-Y to record KRW 8.8 trillion, surpassing 50% of the total TPV for the first time. Offline TPV grew 82% Y-o-Y to KRW 2.6 trillion led by the sustained growth of onsite payments and [ O2O ] payments. Despite [ lapping ] the introduction of Samsung Pay to NAVER Pay, offline TPV continue to grow as users were locked into our service.

In the platform business, we continue to expanding the lineup of loan and insurance comparison services with the launch of new services such as rent loans comparisons, savings insurance comparisons and travel insurance comparisons. The NAVER Pay mortgage and rent loan comparisons launched earlier this year has surpassed KRW 2 trillion in TPV within the 6 months, receiving a lot of attention from financial consumers. In particular, the mortgage comparison service now includes all 5 major banks as partners [Indiscernible] the options available.

Moving forward, we plan to provide a fast and convenient experience to financial consumers seeking to reduce their interest burdens. We understand that the recent vendor payment delays to Q10 -- by Q10 [ feeds ] have created significant challenges for many users and sellers. NAVER is committed to supporting merchants and protecting consumers by swiftly implementing safeguard measures and actively exploring solutions for mutually beneficial partnerships with sellers, including fast settlement.

Next, I will discuss Webtoon's Q2 business results. Webtoon was successfully brought to the public markets to leverage its powerful [ global ] firewall and expand its reach in the underpenetrated markets. With the funds raised, Webtoon aims to further scale up its global creator ecosystem, which includes 24 million creators and strengthen its position as the leading [Indiscernible] on tech platform.

In Q2, Webtoon's revenue posted KRW 382.9 billion, representing a 3.6% increase Y-o-Y, but a 3.0% decrease Q-o-Q. On a constant currency basis, excluding deconsolidated and transfer operations, as reported by Webtoon earlier this morning, Webtoon total revenue grew 11.1% Y-o-Y driven by continued strong growth in paid content and advertising in Japan.

Breaking it down by segment, paid content revenue increased 11.5% Y-o-Y, driven by the release of over some the new titles in Japan, continued efforts to build up the local creator ecosystem in Japan as well as the expansion of global distribution of successes such as Savior of Divine Blood.

These various efforts have drove our MPU and payout ratio to record highs in Japan. LINE Manga helped the overall ad market in Japan across iOS and Google Play Store for [Indiscernible] in May and June. Advertising revenue grew to 2.3% Y-o-Y with [ still ] [ really ] notable growth in Japan, where revenue jumped more than 2-fold compared to the previous year. Lastly, IP adaptations revenue saw even growth across all geographies, increasing to 24.9% Y-o-Y.

In the second half of the year, we plan to continue upgrading our platform with AI-driven personalized recommendation models, like the ones both out in Korea in June to further improve the user retention and expand monetization. In Japan, we plan to continue expanding the proportion of original content and strengthen our [ global ] Firewall power by our local creator ecosystem, content and IP. In the rest of the world, including North America, we will seek to drive organic user growth through IP adaptations and strengthen our ad capabilities to foster growth.

Next, I'd like to share NAVER Cloud's B2B business results. The delivery of NAVER Cloud featuring HyperCLOVA ads continue smoothly in Q2 for March and November last year. We have signed MOUs and are actively engaging in discussions with -- about the implementation of HyperCLOVA X with companies like Bank -- the Bank of Korea, Korea Hydropower Nuclear Power and HD Hyundai. We will share updates once these discussions [ bear ] tangible results. In addition to the companies already announced, we're also exploring opportunities to provide HyperCLOVA X API products [Indiscernible] financial industry to secure further references in Gen AI.

Moreover, we are focusing our efforts on enhancing the performance of NAVER services such as search, commerce and ad by leveraging HyperCLOVA X. In search, we have already adopted an AI technology to understand search content, making algorithms and natural language processing to reflect the latest information more quickly and cost effectively. In commerce, we analyze our user purchasing patterns using Gen AI to [ work on ] products with high conversion probability through our services and ad.

In advertising AI based enhancements have increased ad efficiency, for example, in performance display ads, the launch of customized [Indiscernible] ads and advanced click conversion prediction models led to a 23% increase in conversion rates for some products compared to the previous quarter. Notably, fee placements will now feature more relevant ads through integration with the [ continuing ] ad recommendation engine, resulting in a 29% increase in CTR and illustrating that AI applications are indeed translated into tangible revenue growth.

We're also using machine learning algorithms to automatically analyze the performance of [ ads ] [ and ] campaign and develop optimized targeting strategies. This is expected to further enhance our ad performance.

NAVER is committed to ensuring that AI not only fosters a tech innovation, but also enhances the quality of our services, providing a superior user experience by simultaneously driving revenue growth. Line Works' revenue increased by over 40% Y-o-Y, bolstered by substantial growth in both the number of fake IDs and also ARPU.

Moving forward, we plan to integrate HyperCLOVA X into Line Works to enhance features like message summarization, e-mail drafting, aiming to provide improved product quality and drive subscriber growth and revenue expansion.

Furthermore, the digital twin technology developed and commercialized by NAVER LABS and our cloud team for future growth is now achieving tangible business results with notable references including the National Museum of Korea and a well-known theme park in Korea.

The technology has also gained international recognition. In fact, NAVER recently launched a project to building digital twin platform in collaboration with Saudi Arabia's Ministry of Municipal Rural Affairs and Housing. Going forward, we plan to build a digital twin platform through mapping and precise 3D modeling of major cities in Saudi Arabia. This will facilitate the development of key services, including urban planning and [ flood ] termination and is expected to drive our revenue growth.

Finally, our [ collaboration ] with Intel [Indiscernible] April is progressing smoothly according to the blueprint I shared before. Notably, revenue from AI chip validation projects undertaken jointly by both companies was realized for the first time in Q2, demonstrating NAVER's technological expertise in AI. We will continue to pursue our scheduled projects together and anticipate further revenue from these efforts.

NAVER has set out a road map aimed at achieving carbon negative by 2040 to ensure long-term sustainability and made continued efforts to that and as part of this commitment, as of 2024, all NAVER offices and data centers have earned the patent certification and have exceeded the 50% renewable energy usage target through direct and third-party [ PPAs ].

In June, we released an integrated report detailing our ESG initiatives and achievements over the past year and was named the top ESG company by the rating agencies of [Indiscernible] and recognition for its sound ESG practices.

In the second half of the year, NAVER will continue to leverage AI and data to deliver differentiated experiences to users, accelerate the deployment of our core parts and platforms and proactively identify new technology-driven business opportunities.

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

[Nam-Sun Kim, executive]

Good morning, I am the CFO, Kim Nam-Sun. I will present Q2 financial results. NAVER's Q2 revenue posted KRW 2.61 trillion, up 8.4% Y-o-Y and 3.3% Q-o-Q. Adjusted EBITDA, which excludes variables such as stock-based compensation and depreciation and amortization expenses saw an expanded growth and recorded KRW 638.4 billion, up 23.9% Y-o-Y and 9.9% Q-o-Q, driven by the growth of recovery of the search platform and more effective cost management. EBITDA margin grew by 3.1 percentage points Y-o-Y, reaching 24.5%.

Despite the onetime Webtoon IPO-related costs, including compensation expenses and advisory fees, they were achieved an OP margin of 18.1%, up 2.6 percentage point Y-o-Y, thanks to meticulous business planning and also effective execution as well as the deconsolidation effect of NAVER Z, reflecting a continued enhancement of the company's business structure. This quarter NAVER saw its OP margin increase for 5 consecutive quarters for the first time in 15 years, a milestone achieved right after the financial crisis, demonstrating the robustness of its core businesses.

Next, let me discuss revenue by each business segment. In Q2, the revenue from the search platform reached KRW 978.4 billion, up 7.5% Y-o-Y and 8.1% Q-o-Q. Search ad revenue grew by 6.1% Y-o-Y, thanks to the expanded introduction of [ Place ad ] bidding and redesign of [ Carling's ] responsive creative exposure and enhanced targeting. Display ad revenue increased 8.1% Y-o-Y and 16.1% Q-o-Q, driven by increased performance ad revenue from [Indiscernible], the launch of new products and strengthened targeting.

Commerce revenue reached KRW 719 billion, up 13.6% Y-o-Y and 2.2% Q-o-Q. Within this, commission and sales revenue rose by 26.2% Y-o-Y, driven by the expansion of brands introduced to Brand Stores, increased usage of brand solution package and subsequent solution sales and growth in [ KREAM ]. Membership revenue also increased by 12.6% Y-o-Y, thanks to continued [ U.S. price ] and subscriber numbers and active users. FinTech revenue in Q2 reached KRW 368.5 billion, up 8.5% Y-o-Y and 4.1% Q-o-Q.

Overall TPV in Q2 grew by 20.1% Y-o-Y and 5.2% Q-o-Q, reaching KRW 7.5 trillion. Growth was primarily driven by non-captive TPV, which for the first time accounted for over 50% of the total. Offline TPV also maintained strong growth [Indiscernible] 82% Y-o-Y, fueled by the expansion of online payments and the continued growth of O2O services. Content revenue reached KRW 120 billion, down 0.1% Y-o-Y and 5.9% Q-on-Q, but excluding the impact of NAVER Z's deconsolidation, it reflects a 4.1% Y-o-Y increase.

Webtoon revenue in Q2 grew 3.6% Y-o-Y, driven by strong paid content and advertising revenue in Japan. On a constant currency basis, excluding deconsolidated and transferred operations, Webtoon's total revenue grew by 11.1% Y-o-Y. Snow, its revenue declined by 37.7% Y-o-Y and 37.3% Q-o-Q due to the impact of NAVER Z's deconsolidation being affected in Q2. Excluding this effect, however, the revenue rose by 19.2% Y-o-Y and 12.2% Q-o-Q, driven by a rise in the number of paid subscribers to the camera app.

Cloud revenue in Q2 2024 reached KRW 124.6 billion, up 19.2% Y-o-Y and 6.5% Q-o-Q. B2B revenue grew by 19.1% Y-o-Y but by the inclusion of [Indiscernible] power related projects and [ Neurocloud ] sales and expansion of paid [ IDs ] in Line Works.

Moving on to expenses. Development and operation expenses came in at KRW 682.7 billion, up 6% Y-o-Y due to the deconsolidation of NAVER Z and improved workforce and productivity. When excluding onetime Webtoon IP related costs, expenses dropped by 0.5% Y-o-Y, demonstrating the successful efforts to boost productivity, including efficient resource allocation. Partner expenses rose by 5.9% Y-o-Y, primarily driven by recognition of Webtoon IP advisory fees. Infrastructure costs increased by 20.9% due to the efficient launch of [ CHZZK ] and the acquisition of new infrastructure.

Marketing expenses, on the other hand, decreased by 4.3% Y-o-Y due to the impact of NAVER Z's deconsolidation and improved marketing efficiency in the content segment. In the latter half of the year, we anticipate increased spending on promotions such as for shopping and considering a more strategic and flexible approach in line with Webtoon's global growth objectives.

Now on to P&L by segment. First, the combined search platform in commerce saw improved profitability Y-o-Y and Q-o-Q, driven by the recovery in search platform growth and the expansion of monetization through Guaranteed Delivery and our Brand Package solutions. Fintech profit margin also expanded Q-o-Q driven by growth in payment revenue.

In the content segment, Webtoon recorded losses, which were primarily driven by onetime IPO-related costs and maintained a positive adjusted EBITDA, excluding such funds and costs. Sales [Indiscernible] is narrow due to the impact of NAVER Z's deconsolidation.

Finally the [ Cloud ] segment reduced its losses through top line growth, driven by increased AI-related revenue. Consolidated net profit for Q2 totaled KRW 332.1 billion, up 15.8% Y-o-Y, but down by 40.3% Q-o-Q due to the base effect from the previous quarters gained on the deconsolidation of subsidiaries such as NAVER Z.

Now to cash flow and balance sheet. Free cash flow in Q2 increased by KRW 220.5 billion Y-o-Y due to more stable management of the balance sheet. However, it decreased by KRW 248.2 billion Q-o-Q totaling KRW 245.2 billion due to corporate tax payments and the acquisition of new service for the [ sedan ] [ IDC ].

Over the past 2 years, efforts to liquidate non-core assets have successfully realized approximately KRW 970 billion. With business growth and improved management of the balance sheet, NAVER's consolidated adjusted debt-to-EBITDA ratio improved from 2.2x at the end of Q2 2023 to [ 1.8x ] at the end of Q2 2024. Similarly, the adjusted net debt-to-EBITDA ratio improved from the 1x to 0.4x during the same period.

Next, I will explain the impact of LY Corp.'s share buyback, which was disclosed on August 2nd on the equity holdings [ of ] [ NAVER ]. LY Corp's recent share buyback is a measure to comply with the new regulations of the Tokyo Stock Exchange, which will take effect next year. To maintain its listing status on the high market of the Tokyo Stock Exchange, a company must have at least 35% of the total issued shares as [ floating ] shares.

Therefore, LY Corp has initiated a public tender [ offer ] for its own shares. NAVER and SoftBank [ have ] jointly held [ A] Holdings plans to participate in this public tender offer to reduce LY Corp.'s ownership stake by approximately 1% to 2%, thereby ensuring that LY Corp.'s proportion of floating shares slightly exceeds the 35% on threshold. The final details of the transaction and the exact scale of [ A ] Holding's share sale will be confirmed in September.

Finally, I'd like to provide an update on shareholder return. In accordance with the shareholder return plan established in May of last year, we have canceled as of August 7 approximately KRW 264.2 billion worth of treasury shares equivalent to 1% of the outstanding shares. Looking ahead, we will focus on investing in U.S. growth, while also exploring shareholder [ refunding ] and return strategies.

This concludes our overview of the second quarter financial performance. We now welcome any questions from the investors.

[Operator]

[Foreign Language] [Operator Instructions] [Foreign Language] The first question comes from Eric Cha with Goldman Sachs.

[Minuh Cha, analyst]

[Foreign Language] I have 2 that I want to ask this morning. First, the company has kept your word that you will control your margin and continue on with an upward trend in terms of your bottom line through improvement in the overall fundamental of the company and good execution of the plans that you have. So you were able to drive top line revenue growth.

Now my question relates to your long-term growth. If we look out into 3 years, 5 years along the road, do you still think that you would be able to bring about double-digit top line revenue growth? And what is your level of confidence if you believe that you are able to bring about double-digit growth? And if that is possible, what do you think is going to be the main driver behind that growth?

My second question relates to your search platform business. We see the rebound in display ad is quite salient. How long do you think that this trend can continue? And what do you think are the key drivers behind such rebound and improvement? And also your competitor have said that in order for them to accelerate their growth, they will also focus on display ad. What is your take on the overall competitive landscape regarding display ads?

[Soo-yeon Choi, executive]

[Foreign Language] This is the CEO responding to your question, the first question, that is, because there persists quite a bit of volatility on the macro backdrop in terms of the level of confidence, I cannot put my foot down, but having said that, we still believe that for 3 to 5 years to come, we are very confident that we will be able to drive a double-digit growth.

And the main drivers behind such growth is, as you've seen over the years -- over the past year, we have really focused on driving our product enhancement, which is powered by our AI capabilities, and we will continue to exert that effort for going forward, 1 year, 2 years, really focusing the company's competitiveness in that very area. So we have expectations to be able to drive business on the advertisement and commerce side as well as content, mainly driven by Webtoons.

[Unknown Executive]

So 2 years ago, we shared with you our objective that we would like to drive a double-digit growth and admitting that the overall market growth is somewhat going to slow in the future. In order for us to maintain that level of growth for the upcoming 3 years, we do understand that there would necessarily need to be certain changes to the strategy. We will, however, continue to exert our efforts in trying new attempts at our commerce ad and our main app business so that we could provide a more enhanced and better value back to our users.

Specifically for the display ad, you have to understand we -- that we actually started off from the low base. It is from that base that we have started to speed up or accelerate. And the overall market also for domestic and overseas, we are seeing that acceleration.

Regarding the display ad market, we do not think that it is a zero-sum base gain compared to other platforms in terms of ad product, enhanced targeting as well as creating of the ad creatives based upon and powered by AI. We are basically a later entrant into the market, but we see that we would be able to, therefore, drive a more steeper growth through scaling up of our capabilities.

But we also have to keep in mind that it is not just a display ad that we are selling as a platform. We as NAVER, as a platform, we provide a combined solution starting from the search ads, the display ad as well as the shopping ad. So from the top funnel to the bottom funnel, we are able to provide a product synergy across those different products as well as really leverage NAVER's positioning. So once again, DA does not exist on its own on a standalone basis. Hence, we believe that we would be able to drive overall a very robust growth engine from this ecosystem.

[Operator]

[Foreign Language] The next question comes from Dong Hwan Oh with Samsung Securities.

[Donghwan Oh, analyst]

[Foreign Language] I have 2 questions I would like to ask. The first one is on your commerce business. We see that the overall GMV trend from commerce is slowing, and we see the gap with coupon widening. I would like to understand what your projection is for next year's growth rate? Also, the importance of logistics is becoming ever more important, especially for fresh foods as well as household products. Are you continuously going to keep to your asset-light strategy going forward?

And my next question is that, despite the Webtoon listing-related expenses, your operating profit was quite good. I believe that this is due to a lowering of your marketing expense. And I'm a little bit dubious as to how you will be able to continue on with that low level of marketing expense? As against the total revenue, how low could you go with your marketing expense? And does that have any negative impact on your top line revenue?

[Soo-yeon Choi, executive]

On your first question, recently, we are mindful of a very fast transformation and changing that we are witnessing from the online commerce market. But we, NAVER Shopping, we have a very strong intrinsic value that we offer and that we own within this market. First is the 3P, the 3-party logistics model. Compared to other companies we have a very strong superiority in terms of providing a seller-friendly model as well as being able to sustain high level of user traffic, which is helping us to maintain our very strong #1 positioning.

And I believe that this will also help us continue on with the growth rate that we have seen up-to-date. So this whole virtual cycle and flywheel [ moat ] that the company has, we will continue to keep to and safeguard that competitive advantage. We will continue to enhance and scale up our recommendation capabilities, expand on the Brand Store, adopt database commerce and provide value and new experiences to the application users so that we may continue on with that big of a gap with other players.

On the FMCG side, our competitor, the big category player with a very high growth rate, they have been taking market share from the existing offline sellers, the offline providers. But we do recognize that, that will -- that can trigger and deepen the competition in this market. So we will continue on with a high engagement model employing our approach.

During the first half of the year, we've been testing many different measures, for instance, expanding on the coverage of the guaranteed delivery, providing free refund and exchanges to the members of our membership program and providing an installation delivery and rental delivery services as well and also taking initiative on entering into a standardized unit pricing contract and agreement. So we -- whilst we will keep on with our light-asset approach, we are providing -- we are putting in efforts to provide a benefit that is on par and no different to what is being provided by our competitor.

Well, we also want to accentuate that within our ecosystem, basically, what NAVER's intent is to grow together with the participants of this ecosystem. Of course, all the participants of the commerce ecosystem cannot have one single objective or purpose or one -- or have one single value set. What therefore, we focus on is to grow together with the brand and the small and medium vendors and merchants who are part of this ecosystem. And in order to do that, we want to be able to provide a broader user value to these participants and really [ home ] in on specific areas that our competitors are unable to reach.

[Unknown Executive]

Your question on marketing spend, it was never our intent to intentionally lower the marketing spend. We have to look at this from 2 aspects. First is on the content business and second on commerce. First, talking about content business. The reason why marketing spend has gone down is, the first reason is deconsolidation of [ ZEPETO ]. And second is for the Webtoon business in Japan in Q2, the growth had been very good, which had an impact of us pushing back marketing activities into the third quarter.

Now if you look at commerce, actually, the overall marketing spend or marketing expenditure had gone up. If you combine search and commerce together, their profitability has actually improved, it's [ gone ] up, and this has been driven by acceleration of the SA business, the search ad business. But if you just take and carve out the commerce business in terms of the fact that we had conducted a lot of free promotional activities, that had actually lowered or had negatively impacted the profitability of the margin.

So when I take a look at these marketing line item, I think, especially for our commerce business, what we need to really focus on is not just a short-term GMV, the volume per se, we need to always keep in mind that we have to have our return -- our investment ROI [ at ] always the positive number, not negative, which means that we need to be able to secure a very robust cohort of our users so that even at ROI plus we will be able to have a constant level of marketing expenditure. So from a long-term perspective, that means that we need to be able to provide more value back to our consumers so that when it comes to marketing spend, we can still ensure ROI plus and be able to drive revenue faster.

[Operator]

[Foreign Language] The next question comes from Stanley Yang with JPMorgan.

[Stanley Yang, analyst]

[Foreign Language] I would like to ask 2 questions. First one, on your search platform, the combined ad business revenue. If you look at the total revenue growth, we've seen a growth and in Q2, it was about mid-7% level. What is your outlook going forward for the second half of the year? And in terms of the long-term perspective, if there is a stronger macro downturn that is along the way, how far do you think that your search platform ad revenue can actually go?

My second question has to do with your AI business, particularly on your [ queue ] services, there's been quite a bit of anticipation and expectations for the [ queue ] service as it is your core product, that is a B2C product that is powered by AI. I understand that at this point it's applied to your PC platform, but not mobile yet. What is the level of confidence that you have behind the [ queue ] product and even with the need to spend more -- your plans to further expand [ queue ] as it is a B2C service on AI? And also, what is your take on the timing of monetization from these products?

[Unknown Executive]

In terms of the advertisement revenue growth in the second half, as you've seen from the trend from Q1 and Q2 where there was an acceleration, I think as we go into second half, it's actually not going to slow, or it's actually going to speed up more rather than slow.

No, but that is very difficult to answer the question as to when the macro situation normalizes and takes rebound, what impact would that have on the advertisement -- overall advertisement growth. I say that because not just for a -- NAVER, but all of the advertisement platform that you see globally and the acceleration of the growth that you see, all started from a low base. So even from a historical perspective, this is an elevated level.

Now, but compared to other global advertisement platforms, I told you also previously that we were a later entrant into this market through our advertising product enhancements and AI-based targeting enhancements. So we were late compared to others. So compared to the overall macroenvironment, I believe that we still have a quite strong driver behind the acceleration of the advertisement growth within the NAVER platform.

And on top of this, if you look at our shopping ad, the growth there had been quite slow up-to-date, but by taking, for instance, increasing a -- or expanding on the advertisement slots or by introducing effective ad products or doing more active sales activities against the advertisers, we are going to try to support that growth once again from the shopping ad, which I believe with -- at the end of the day, will help with the growth of the NAVER advertisement going forward.

[Soo-yeon Choi, executive]

And on your question related to queue, we are continuously running different tests and experiments to see the level of satisfaction that on the PC platform, the queue in terms of the long-tail query, the level of satisfaction that it's giving us -- that it's giving the users that is. And by the end of this year, we are also planning to apply that to mobile platform as well.

Now also in regards to conversation-centric AI-powered agents or other enhancement of the shopping-related capabilities or the sophistication thereof, yes, we're making strategic reviews as to whether we could apply generative LLM, large language models to these different types of products, but they will be in the form of a very strong coupling with our existing business models of our core businesses such as search, advertisement and commerce, and we are not thinking of a separate monetization business model per se for this product.

Well, we have been able to see very clear results -- positive results when we apply our AI capabilities to our existing services like search, and we've seen higher satisfaction from the feed service and higher advertisement effectiveness and efficiency. So even if it will entail more cost and expense since we have ample capacity to make investment, we are considering expanding and doing different things with our AI-powered B2C services.

If you look at Line Works, this is a subscription model based B2B business, and we have brought and incorporated HyperCLOVA X capabilities, and we are looking forward to additional add-ons and additional monetization opportunities from that endeavor as well.

[Operator]

[Foreign Language] The next question comes from Hyo Jin Lee with Meritz Securities.

[Hyo Jin Lee, analyst]

[Foreign Language] I have a question relating to the state sales by LY Corporation. And my question relates to, going forward as SoftBank and NAVER maintains their current shareholding structure at this point, do you think that NAVER will be able to continue on with this status as a majority shareholder and still have that control over [ Line ]? And also going forward, do you think that your business cooperation with SoftBank will further expand or it will contract?

[Soo-yeon Choi, executive]

Now, regarding the issues that have been triggered in the first half regarding LY Corp, it's become very clear that the Ministry of Internal Affairs of Japan, their guidance basically was specifically with regards to the security-related issues and the governance aspect. And so at this point, we are not in -- we are in no position in reviewing whether we are going to change the level of our majority shareholder status or reduce the controls over Line that we have. We will stick to our previous strategy.

And there's been a more clarification on the guidance that's been issued by Ministry of Internal Affairs regarding the governance aspects. We will faithfully comply with the requirements of the guidance and the executives of the [company ] will also think hard as to identifying areas where both companies can actually generate more synergy and our efforts will be focused on that.

[Unknown Executive]

Thank you. I think we've spent ample time on the Q&A. So this brings us to the end of the earnings presentation by NAVER. Once again, thank you to all the investors. We ask for your continued support. Thank you.

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