Hello, I'm Jeffrey from Kakao IR. Let's begin with the first quarter 2025 earnings conference call. Today I am joined by Shina Chung, the CEO, and Jaden Shin, the CFO. Please be reminded that the earnings results are consolidated estimates under the KIFRS basis and are subject to change upon the auditor's review. Also, forward-looking estimates are based on assumptions, so actual results may differ from figures included in today's presentation. Now we will have a presentation from CEO Shina Chung.
Good morning, this is Shina, CEO of Kakao. In today's mobile landscape, global platforms are increasingly expanding their share of user engagement time by focusing on social and content-related features. As a result, competition among platforms to capture the user time spent is intensifying. Furthermore, platforms that specialize in social features and content are beginning to extend their influence into the messaging space as well.
This signals that competition across all areas—social, content, and messaging—will only become more intense moving forward. Despite being the most frequently visited mobile app in Korea, Kakao still lags significantly behind the leading platforms when it comes to user time spent. Having grown primarily as a messenger, KakaoTalk is now actively evolving into a super app by strengthening its content offerings and social features. Through this transformation, we aim to increase our share of user time spent on the platform. The Discovery section, which we first introduced last quarter, is an initiative aimed at driving greater content consumption within our platform. Scheduled for release in the third tab of KakaoTalk later this year, the Discovery section will offer a feed-based service featuring short-form videos, currently the most trending content format among users.
We expect that, in addition to traffic driven by direct messaging, this new section will attract more browsing and discovery-oriented traffic. This, in turn, should significantly boost user engagement, including time spent on the platform. In tandem, we plan to enhance features that support the sharing of everyday content during the second half of the year. This will improve user experience and deepen engagement. KakaoTalk already supports a vast nationwide network connecting virtually the entire population. Users have, on average, over 410 friends on the platform. Among them, 23% update their profile about six times per month, actively sharing content from their daily lives. On average, users are exposed to over 23 new contents per day, showing strong potential for content consumption.
The updated profile section has become the most frequently clicked and noticed area within the friends tab, which clearly indicates that sharing and interacting with everyday content among acquaintances is already well established. Given the strong network already in place within KakaoTalk, we anticipate that enhancing content sharing features in the later half of the year will lead to more advanced usage patterns and a rapid increase in traffic. This year, KakaoTalk aims to increase user time spent on the app by 20% by expanding browsing traffic, traffic that comes not only from messaging but also to consume friends' updates and trending short-form content. If our new services gain traction successfully, the traffic that has traditionally been concentrated in chat will expand into more monetizable areas.
This will allow us to gather and leverage a wider range of user behavior data, ultimately enhancing the overall business value of our platform. As of last year, approximately one-third of ad revenue in TalkBiz came from single products, big four display ads. In 2025, we plan to roll out a variety of impactful ad products that align with new usage context and traffic patterns enabled by our latest services. This will lay the foundation for creating new advertising revenue streams that could potentially surpass the scale of Bizboard. Next, I would like to talk about AI, another core pillar of Kakao Group's business. As mentioned during our last earnings call, our goal for this year is to launch the most widely adopted AI service for everyday users in Korea and to establish it as a sustainable business.
To achieve this, we are actively pursuing a variety of trials and experiments within the Kakao ecosystem this year to find the right answers. One such experiment is Kannana, a beta version of which we are unveiling today. Kannana's strength lies in its hyper-personalized AI companion. The more users interact with Kannana, the more conversations accumulate with their personal AI mate, Nana. Similarly, in group chats, the interactions with the group AI mate, Kanna, are stored and used to understand group context and provide assistance accordingly. By understanding both individual and group context, and by integrating data from Kakao Group's diverse B2C services, we believe we can further enhance the personalization capabilities of the AI mate. Based on this deep personalization, Kannana aims to proactively assist users in managing their schedules and accomplishing a variety of everyday tasks more easily.
Building on Kakao's history of extending relationship-based context into a variety of services and businesses throughout KakaoTalk, Kannana takes this a step further. As interactions accumulate between users within the service, AI Mate, Kanna, learns to infer conversational context and actively engage based on the situation. This not only enriches user relationships but also creates opportunities to discover new services and business models rooted in these interactions and contexts. Starting today, Kannana will enter a public closed beta test with early users. As it is still in the beta stage, we ask that you view it not as a fully polished product but as part of our ongoing journey to find the right answers. The primary goal of this beta test is to assess service stability while observing which type of prompts users engage most frequently.
This will help us validate our hypothesis regarding the general public's needs and behaviors when using AI. Additionally, we aim to understand how users perceive the experience when their personal data and relationship history accumulates within Kannana to enable hyper-personalization. We will also test what kinds of prompt formats best motivate users to record more of their own data on the platform. Following this initial CBT, Kannana will go through several upgrade phases with new features addition before its official launch. Next, I'd like to briefly update you on several other new initiatives we first introduced last quarter. I'd like to note that AI services within KakaoTalk, including the AI Mate and Generative AI Search, will be officially branded under the Kannana name once they are launched.
Regarding vertical AI recommendation functions, following the open-beta launch of AI Mate Shopping in Q1, AI Mate Local recently completed its internal CBT and received positive feedback. Currently, AI Mate Shopping exists only in the form of a Talk Channel, but we plan to deeply integrate it with Kakao's broader commerce ethics to provide users with product recommendations tailored to their context and needs. As for AI Mate Local, it will be linked with Kakao's local services, specifically Kakao Map, to enhance user discovery and exploration experiences. As for Generative AI Search, we are currently exploring various entry points and usage context in the light of upcoming KakaoTalk renewal in the second half of the year. We will share more detailed updates on this as the planned program.
The new AI services Kakao is developing this year are expected to either create additional synergy by tightly integrating with our existing businesses or broaden platform use cases that previously did not exist, ultimately contributing to increased user engagement. Starting with Kannana in the first half of the year, we plan to sequentially introduce a range of AI-driven initiatives, including vertical AI recommendations and generative AI search within KakaoTalk, and jointly develop products with OpenAI. Through these efforts, we aim to lay the foundation for AI to become the core growth engine for Kakao.
Next, CFO Jaden Shin will present the first quarter 2025 financial highlights.
Good morning, this is Jaden, CFO of Kakao, all run through Q1 consolidated financials. Q1 consolidated revenue was ₩ 1.864 trillion down 6% year over year and 5% quarter over quarter. Q1 platform revenue was ₩ 993 billion up 4% YOY but down 5% QQ. First, Kakao's core business TalkBiz reported revenue of ₩ 553 billion up 7% YOY and flat QQ. Q1 TalkBiz revenue reported ₩ 286 billion, driven by solid growth from business messaging growing 3% year over year, but on impact from low seasonality, there was 11% quarter over quarter decline. Firstly, business messaging revenue increased 11% YOY, sustaining a double-digit uptrend. In Q1, revenue growth was somewhat muted due to longer-than-usual New Year's holiday and the slump in defection and commerce businesses, which usually makes big revenue contributions.
Nevertheless, with the launch of Brand Message product in May, which is a marketing message sent out based on customers' opt-in content, we expect year-over-year growth to gradually recover starting from the second quarter. Q1 display ad was also impacted by the long holiday, and major advertisers reduced their budget, driving year-over-year revenue down 4%. We expect recovery to be slow in Q2, and year-over-year revenue will continue to trend downward following large-scale advertisement spending by Chinese e-commerce advertisers last year. In the second half, as we prepare for the launch of in-feed ad products and as we are ready to expand the advertiser pool for video ads in time for KakaoTalk Messenger revamp, we expect the growth to recover sharply. Q1 combined GMV for commerce was ₩ 2.6 trillion, up 3% year over year and down 2% quarter over quarter.
TalkGift strengthened product curation, optimized for seasonal demand for premium food products during New Year's holiday when gift purchasing is at its peak. By adding momentum behind gifting for self-use through a distinct and exclusive monthly product lineup, the theme for gifting and self-purchasing all expanded, driving GMV up 4% year over year. For Talk Deal, underpinned by refined search and recommendation, conversion rate increased, driving growth of 5% year over year, while total GMV for TalkGift TalkStore remained flat year over year. Commerce revenue reported ₩ 267 billion up 12% year over year and 13% quarter over quarter. Top-line growth outperformed GMV because in Q1 we extended one-piece products targeting New Year's holidays and because the share of Kakao Shopping Live, which makes higher profit contribution out of total TalkStore GMV, extended 5 percentage points year over year.
Next, on the back of low seasonality for ads and lower accessibility to news content following the app revamp, traffic dipped marginally, driving total revenue down 12% year over year and 11% quarter over quarter to ₩ 74 billion. Platform and others' revenue increased 3% year over year but down 10% quarter over quarter, reporting ₩ 366 billion. For the mobility business, as holiday was longer than usual, mobility demand was diverted to overseas, pushing down on overall service demand. Despite this backdrop, we were able to sustain year over year uptrend on the back of expansion of parking and personal delivery and service upgrades. Kakao Pay continued on with high growth across financial services, posting double-digit revenue growth, while Pay Securities reported profit for two consecutive quarters, and coupled with cost efficiency gains, Pay achieved a turnaround in operating profit. For the content business, in Q1, revenue reported ₩871 billion, down 16% year over year and 4% quarter over quarter.
Q1 revenue for the story business was down 6% YOY but up 5% QQ to ₩ 213 billion. Competition is becoming fierce among top players in Japan, so Piccoma is staying away from expanding short-lived promotions rather than focusing on the efficient spending. As a result, despite maintaining a large cut in marketing spend in Q1 in line with the preceding quarters, yen-based GMV and revenue reported similar levels versus last year and the previous quarter. Operating profit margin sustained its double-digit level, solidifying the basis for earnings generation. On the back of high base effects from active appearances of Anchor IPs, including IU, NCT Dram, and Aespa since last year and the previous quarter, music revenue was down 6% YOY and 7% QQ to ₩ 438 billion. Even in the absence of performances of Anchor IPs, new IPs drove meaningful results, gaining solid positioning in the market.
Starting Q2, major artists will resume their performances, and we expect the portfolio to gradually find its balance and drive stronger growth. Lastly, for media business, reported ₩75 billion down 21% YOY on slowdown in TV ad market and subdued content investment. Nevertheless, there was 2% QQ growth on continuing impact of revenue recognition of titles deferred from the previous quarter. Next is operating expense. Q1 operating expense was down 6% YOY and 7% QQ, coming in at ₩ 1.758 trillion. Breakdown of expense items for Q1 are as follows. Despite wage increase, labor costs came in flat YOY thanks to efficiency gains based on conservative hiring, while QQ, it declined 4%, reporting ₩ 479 billion with the absence of high base effect from additional bonus pay recognition at subsidiaries.
Driven by ongoing efficient marketing spend, marketing expense came down 3% year over year and 16% quarter over quarter, reporting₩ 87 billion, accounting for 4.7% of consolidated revenue. Revenue-linked expense fell 15% year over year on sluggish content revenue, while increased by 7% quarter over quarter to ₩ 701 billion. Proportion of revenue-linked expense against consolidated revenue stands at 38%. Outsource and infrastructure expense increased 2% year over year but declined 28% quarter over quarter, coming in at ₩206 billion. Sizable quarter over quarter decline is due to the reclassification of part of revenue-linked expense of subsidiaries under outsource and infrastructure expense. Depreciation and amortization was ₩ 206 billion, down 16% quarter over quarter on the base effect from one-time bad debt expense of Kakao Pay last quarter. Compared to last year, there was 4% increase arising out of investment for equipment required for AI services. All in all, Q1 consolidated operating profit was ₩ 105 billion, and OP margin reported 5.7%. Q1 non-operating income reported ₩ 78 billion.
Other non-operating income reported ₩ 104 billion, up ₩73 billion, quarter-on-quarter on one-off gains following sale of assets held for sale and assets subject to equity method treatment. Other non-operating expense was ₩ 38 billion, down ₩ 490 billion due to the base effect last quarter for impairment loss on goodwill and equity method investment. Financial income reported ₩1 01 billion, up ₩ 21 billion year-on-year due to higher dividend income, but it was down by ₩ 59 billion quarter-on-quarter due to high base effect from last quarter from one-off derivative valuation gains. Financial expense declined ₩ 46 billion , recording ₩ 123 billion due to the base effect last quarter of valuation loss on financial assets. On the back of solid earnings from KakaoBank, equity method income came in at ₩ 51 billion , up ₩ 27 billion quarter-on-quarter. Equity method loss decreased ₩ 20 billion , reporting ₩ 16 billion on reduction in losses from affiliate companies.
Q1 corporate income tax reflects deferred tax adjustments following consolidation of subsidiaries, and as a result, consolidated net profit came in at ₩ 191 billion. Lastly, on CAPEX. In Q1, total CAPEX was ₩ 135 billion, comprising ₩ 103 billion investment in tangible assets and ₩ 32 billion CAPEX for intangibles. CAPEX for this quarter was flat YOY but was higher by ₩ 27 billion QQ due to AI-related investments, which includes GPUs.
This concludes Q1 2025 earnings highlights. We will now move on to Q&A session. Due to time constraints, please be asked that you limit your questions to two per person.
[Foreign language]
Now Q&A session will begin. Please press *1, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one.
For cancellation, please press star two, that is star and two on your phone.
[Foreign language]
The first question will be provided by Seungho Choi from DS Investment and Securities. Please go ahead with your question.
[Foreign language]
Thank you for taking my question. I have two questions that I would like to ask.
The first question relates to the visibility and your projection of what you think the advertisement market is going to look like as we enter into the second quarter. I understand that you are planning for a KakaoTalk renewal, including the Discovery section and various different AI initiatives. Can you provide us with some color as to how your future growth-related plans are going to be implemented going forward? The second question is that we see that compared to the GMV growth, the take rate increases had been higher, and I believe that this has brought about some quite positive steepness in terms of your commerce growth, both on year-over-year and Q on Q basis. Do you think that this trend could continue on into the future?
If you could just share with us what your plans are in terms of KakaoTalk Gift and how you're going to continue to drive this trend.
[Foreign language].
Responding to the question about the advertisement cycle, if you look at the advertisement market during the first quarter, there was actually no clear signal for any salience improvement, and commerce and fashion segments were quite sluggish, and companies slashed back on their marketing spend as well.
Starting from last year, in light of the macro environment, basically internally there is a sense of crisis that even if we put in all-around efforts under the current system of services and products, we would either be able to simply maintain or maybe just defend decline in our top-line revenue. That is why we are preparing for new advertisement products for the first half of the year in line with our service revamp, which is planned for the second half of the year so that we can once again trigger a momentum behind the growth of our advertisement business.
[Foreign language]
[Foreign language]
Thus, we are first planning on expanding the feed-type advertisement products that can support many different sizes and ad formats, following up on the release of feed-type services as part of the KakaoTalk renewal. This in-feed ad delivers a very natural ad viewing experience similar to viewing content, so advertisers find it to be an effective mode of communicating the brand message. It's actually already a proven business model. The third tab, which is going through a transformation as a Discovery section, will be adopting this feed-type ad as well, and our aim is to maximize the value of this surface by driving top line that is more than two times higher than before.
[Foreign language]
In recent years, users are spending increasing amounts of time viewing videos, especially trending short-form content. The video ad market is estimated to have grown to around ₩ 1.7 trillion as of last year.
Most of the top advertisers of such video ads in the domestic market are already running their ads on Kakao platform, and the share of consumer goods companies is quite high in terms of their budget spending on our platform, as this is a sector that Kakao is strong at. Now, admittedly, we had limited services and spaces to run such video ads, so it was difficult to fully respond to advertisers' needs and requirements, and revenue contributions from video ads are also quite low. By setting up services for the Discovery section, coupled with the launch of the video ad product, we plan to win a meaningful level of ad budgets from the advertisers.
[Foreign language]
[Foreign language]
As I mentioned during the opening presentation, we will strengthen content and social features to drive up users' engagement and time spend and satisfy different needs of the advertisers through the feed-type ad and video ads as well. This year, we think new services will start to gain footing in the market, and starting Q4, we expect ad revenue to regain its double-digit growth trajectory, and I believe that uptrend will be steeper starting from next year.
[Foreign language]
[Foreign language]
Now, responding to your question on KakaoTalk Gift, if you look at Talk Gift this year, it continues to show growth in terms of GMV for self-purchasing. Inside the daily platform of KakaoTalk, we've been able to strengthen the flow of converting users' connections and relationships, emotions, and contests into commerce so that we could expand on the commerce experience, which is unique only to Kakao.
Right now, if you look at TalkGift GMV, mostly it comes from the friends tab, particularly from friends with birthday segment and seasonal promotion section. There are many other scenes where users congratulate and cheer for one another, one of which is the chat room. On May the 6th, we tried something structurally different by naturally linking gifting through new features by capturing different events mentioned in the course of everyday conversations that happen inside the chat room.
[Foreign language]
and interaction features, which will create another expansion opportunity for commerce. However, the details of the second half reorganization are still being finalized, so I will share more specific business plans at a later time. Basically, when words like congrats or thank you come up, this feature enables visual effects, making expressions of emotions much more enriched and abundant while naturally suggesting context-aware gift ideas. Through such features, we were able to enhance user access and convenience as well. It was only recently released, but we expect it will create new scenes for purchase inside the chat room where most of the interactions of congratulating, thanking, and rooting for one another take place. Also, as of the first quarter, there are an average of 1.9 million D-day related data built up inside the Talk platform.
We think the KakaoTalk revamp that's scheduled for the second half will be able to strengthen interactions and sharing of people's everyday events in their lives, which we expect to create another expanded opportunity for our commerce business. For more details on the KakaoTalk upgrade, we will come back to you with a detailed business plan since it is still a work in progress.
[Foreign language]
Next question, please.
[Foreign language]
The following question will be presented by Jay Hwang from Merrill Lynch. Please go ahead with your question.
[Foreign language]
Thank you. I am Jo Ah-hyung from Merrill Lynch. Thank you for the detailed explanation on your earnings. Would like to gain some color on what your second quarter financial outlook is.
[Foreign language]
This is Jaden, the CFO. Responding to your question on the second quarter outlook, if you first look at the first quarter results, it was quite muted because of off-seasonality from our platform business and lack of IP pipeline for the content business.
Internally, we were able to confirm the bottom in terms of our annual performance, and we believe that starting the second quarter, we can expect a rebound in terms of our P&L coupled with top-line growth and cost efficiency gains. First, if you take a look at our platform business, it is still grounded on solid fundamentals, and in Q2, we expect favorable seasonality will work to our benefit across our businesses, including ad and mobility. Especially for Talk Biz, which makes our biggest profit contribution, we will be able to see stronger bases for top-line growth as we enter into the second half, as we go through with the renewal of the Talk platform in Q3, coupled with the launch of new business model.
[Foreign language]
For the content business, there continues to be lack of new titles from Kakao Games, but there are positives from our music IP pipeline, and Piccoma is seeing structural profit improvements. Once we enter the high season, positive impact will start to come through. For businesses that are predicated on commercial success, there still exist uncertainties, but IP lineup for content is going to be more positive for us in the second half of the year.
Since the second half of last year, there was negative growth based on our consolidated revenue, but starting Q2 this year, we will be able to show growth recovery year over year as we offset the slump in content business with robust fundamentals of our platform business. Also, recently, we've increased investment for our future growth. The fixed cost burden is increasing, but our stance is still focused on efficient spending.
Under a sustainable financial position, we will do our utmost to drive gradual quarterly improvement in both revenue and profit.
[Foreign language]
As we're running under a time constraint, we will take the final question.
[Foreign language]
The last question will be presented by Dongjun Kim from CLSA. Please go ahead with your question.
[Foreign language]
Thank you. I have two questions.
First one, we've recently seen new spikes on the possibility of sale of your subsidiaries and affiliates. We'd like to understand what the update is and also what's the purpose of the proceeds once you go through the sales process. Where would you be using that proceeds? Second question is, we hear a lot about your collaboration and cooperation with OpenAI. Can you provide us with an update in terms of the detail of that arrangement?
[Foreign language]
[Foreign language]
Yes, several of PEs that invested into Kakao Group are nearing their exit timeline, and it is true that there are discussions on the method of that exit and corporate value enhancement, but nothing specific has yet been decided. Now, regardless, KakaoTalk platform and AI have been set as our key pillars for future growth, and it forms the foundation for the group's longer-term growth strategy based on our unwavering focus on our core businesses.
As mentioned during the earnings release in Q2 of last year, we are streamlining our businesses that we consider are less relevant to the group's core business, and as a result, the number of Kakao Group subsidiaries has changed from 147 as of May of 2023 to currently 104 once the Neptune sell-off is complete.
[Foreign language]
Now, because macro volatilities are still quite elevated, it's not easy to speed up this process, but we will do our best to turn our businesses more efficient in full consideration of the circumstances and the positions of various different stakeholders, including shareholders and our partners.
[Foreign language]
[Foreign language]
Kakao, as it reorganizes the group structure, will concentrate on investing into core fundamental business. If you look at the ROE calculated on the basis of the first quarter net profit attributable to controlling shareholder, which captures one-off impact, it was actually 6.5%, an increase of 3.5 percentage points year over year. Even net of such one-off factors, we were able to confirm a meaningful upward trend.
At Kakao, we will continue to re-accelerate the growth of our Talk Biz, which entails a high level of ROE and brings about an enhancement in the overall margin profile and explores new growth levers for the future as well, so that we can sustain an ROE uptrend.
[Foreign language]
Regarding co-product partnerships between Kakao and OpenAI, I would first like to ask for your understanding that we are unable to share more detailed updates at this time, as this is a project being pursued jointly under mutual agreement between the two companies.
[Foreign language]
As we disclosed last quarter, the proposed service being developed through this collaboration is expected to go beyond simply providing assets. Instead, it will carry out more complex tasks by utilizing function calls to navigate across various services within the Kakao ecosystem. Kakao and OpenAI are in the process of aligning on the overall direction of the project and have begun active collaboration in the initial phase of development.
[Foreign language]
[Foreign language]
Our collaboration is structured to maximize synergy by dividing roles based on each company's respective strength. OpenAI, with its world-class capabilities and technological leadership, will be responsible for the overall AI model-related areas. Kakao, on the other hand, will focus on leveraging its extensive know-how in user experience gained from serving the entire Korean population and on creating agentic AI, connecting its already established and comprehensive B2C service offerings, which span the entire user lifecycle into Kakao's business ecosystem.
[Foreign language]
[Foreign language]
By combining the technological capabilities and platform infrastructure of both companies, Kakao's goal is to create the most widely adopted, consumer-oriented AI service, not only for the mobile era but also for the upcoming AI era. Collaboration is moving in a positive direction, and as mentioned in the previous earnings call, by the end of this year, we aim to offer all users in Korea the opportunity to experience the agentic AI ecosystem that Kakao is newly introducing.
[Foreign language]
Thank you, ladies and gentlemen, for joining our first quarter.