Well, I think in the interest of time, we're gonna, if people can find their seats, I think we're gonna get going on the, the next one here. So apologize. Okay, so it's my pleasure to introduce WEBTOON Entertainment, David Lee, CFO. David, thanks for being part of the, Communacopia Technology Conference-
Yeah
-as a recently public company.
It's great to be here. I feel like I just came out of public company retirement to be here. Here I am back again.
All right, well, it's great to talk to you, David. For those in the audience who may be less familiar with WEBTOON, maybe we could take a step back, take the opportunity, introduce folks to the company, talk a little bit about your geographic exposure, the products you're building, the platform you're building, just to level-set the conversation.
Sure, sure. First, I'm not at all surprised that many of you have never heard of this company called WEBTOON, but I would make a very large bet that you've seen a lot of our work. In fact, two of Netflix's top ten of all-time projects came from us, because what we are is we are a global digital storytelling hub. We have roughly 170 million monthly active users. On average, they spend 30-60 minutes every day. And why do they do that? They do that because we provide this flow, we said in the last quarter, up to 120,000 new stories per day from 24 million strong creators globally. Our format's a little bit different.
Sometimes I think of this webcomic or WEBTOON format as being essentially a digital storyboard, because if you're here in North America, I bet if you're in the Gen Z population, there's a good chance we're on your phone. And this generation, they wanna discover on their own a story that no one else has seen. We uniquely can do it because we have a constant flow of new stories from all these global creators, the most of which are amateurs. Their motivation as creators is to see if someone just might love the story they've been dying to tell. We make it super easy for them with our platform called Canvas here in the US, where you can publish your own story with a combination of visuals and enough graphics in a vertical scrolling format we call a WEBTOON.
It allows consumers to, in a moment, see where a story is going, and it allows folks like Netflix or Amazon Prime to see what stories have become major hits amongst which populations, driven by data and AI. In terms of why you may never have heard of us, even though I bet a lot of your Gen Z friends have, it's because we originated out of Korea, where we're like the Kleenex of digital stories. 50% of every household in Korea know and love us, but we're just getting going in the rest of world. In fact, we only have 5% of household penetration in the rest of world, 15% in Japan, but we're going strong. In Japan, LINE Manga is the number one consumer app that we talked about in Q2, even including video games.
Here in the U.S., we're seeing signs in the first half of this year that people are really creating the same habits we've seen globally. 41% increase in average revenue per paid user in the first half year in the rest of world, and organic MAU growth in the first half was nearly 2%. We're really excited to bring this story to you, even though I think we're probably not well known by many, and we're just beginning our life, as a public company here in the U.S.
Okay, so with that as a backdrop and against the market dynamics you laid out, I think one of the number one questions we get is just a little bit of education about the competitive landscape and your competitive positioning, if we were to look through the prism of Korea, Japan, and then rest of world right now.
Yeah. Well, first, I'll give you our perspective on competition, but more importantly, I wanna give you what the consumer says, because the consumer is the source of truth on what they choose to spend time on. But first, our perspective. We're the global leader in every. Overall, we're the global leader in webcomics, but we're the global leader in every country and market. There is no other platform where a creator in one part of the world, Japan, France, the United States, can have a great success in one market and then immediately go global. You know, when Rachel Smythe was a graphic designer in New Zealand four or five years ago, and she had a story to tell, we enabled her to not just tell it in one part of the world, but globally. She became a New York Times best-selling author.
She is rumored to be releasing soon as a major animated release, so we feel like we're the only source of global market signal in 150 countries, with 170 million, roughly, MAU, and we're the only source where 24 million creators strong continue to publish new stories every day, but well, that's what we say. Let's talk about what the North America consumer says, not the Asian consumer, right, so we did a major study of who loves us here in North America, so 75% of our users here in North America are the coveted Gen Z sub-25-year-olds. Everywhere in the world, by the way, it seems that people love good stories, so whether you're in Asia or in the U.S. or some other part of the world, we still see the same behavior.
They spend an average of thirty minutes for a WEBTOON per day. They spend an average of sixty minutes for a web novel. Here's what North America consumers say about competition: 77% say they can't get the stories they love on our platform anywhere else. I'll explain why. 97% of our North America consumers say that, versus Netflix and TikTok and other alternatives, that we have a much more fun experience. My view is that we don't yet compete for the time that these Gen Z consumers spend on social networks or mobile games... because unlike having to be in the moment before the jump, the shark, highly popular, moment overtakes, say, a TikTok reel, our format creates time. You can start and stop it in a second. Our stories, serialized, can last for ten plus years.
You can look for the next episode, whether it was created seven years ago, and it feels like you've discovered something brand new. We have a new story for you every day. For us, the format is sufficiently different, and we're the category leader, where I don't worry about sourcing time away from any existing consumer tech platform. When I'm 75%, you know, gen pop penetrated, or maybe just 50% like we are in Korea globally, we may have a conversation about who do we have to take time from, but we're nowhere near that, even with the level of financial scale we have today.
Okay. You've got three revenue segments. In many ways, they all feed into an ecosystem more broadly. Talk a little bit about your three revenue segments and how they factor into the potential for long-term growth for the platform.
Yep. So, as mentioned, you think about our current revenue in a pie chart, and it's pretty simple. 80%, the vast majority of the revenue we make today, is what we call Paid Content. I want to explain this, though, because when I was, you know, in mobile gaming, helping Zynga turn around, or when I was in commerce at Best Buy, I thought about Paid Content in a different way than we do. So let me come back to that. There's roughly 11% or so in the quarter that you would recognize as traditional advertising.
By the way, if you look at our 170 million MAU, you look at the time they're spending, you look at their demographic, you look at the fact that we source our own content through our, our creator ecosystem, you can come up with your own estimate of what that revenue should be. Some others have estimated that it should be as much as we currently have in Paid Content, but we can come back to that. There is a small, small portion, a portion that we have chosen not to put capital at risk and large scale on, which we call crossover IP. These are the hundred examples of our stories becoming major hits in, in North America.
Like, I don't know, Marry My Husband on Amazon Prime, or The 8 Show on Netflix, or many, many others in Spanish and other languages. So let's double-click a little bit on Paid Content. Paid content here, our founder, JK, he started this company twenty years ago with this maniacal focus on just, "Let's create a great opportunity for creators and consumers, and let's make it easy. Let's not force them into a subscription. Let them surf and read for free for as long as they want.
But when they find a story, a story that they get to pick, and it's from an unexpected source, because we have new stories every day, let them choose to pay $0.15-$0.70 roughly to see the next episode of the story when it comes out live. That micro purchase turns out, through cohort data, when they choose to start to pay to read, they choose to read more over the next three years. This is really important because in my time in mobile gaming or in e-commerce or in advertising or even in CPG, I was always pushing monetization. I was buying expensively, top of the funnel MAU, and hoping that they would shake out through my funnel, that they might turn into a paying customer. I don't need to do that. I don't need top of funnel MAU growth to drive persistent double-digit revenue growth.
In fact, in the last quarter, we delivered 11% constant currency growth. A lot of investors didn't recognize the fact that constant currency is much more important than a thirty-seven-year low of the yen versus the USD. But if you actually look at our results, we over-delivered versus our own expectation, paid content metrics across the board. So in paid content, we look at things like, well, what's the average revenue per paid user? I referenced in rest of world, it grew 41% in the first half. That's a sign of habituation because we'll call her Maddie. Maddie, in North America, our average target consumer, when she finds a story that she wants to read, she reads more.
So now, instead of just buying access to one episode and one story, she may have confidence to want to have access to three, four, five stories, which is how revenue grows in paid content, even if MAU is flat. So that's the paid content growth story, and it's both geographical. There's room to grow in Korea, where we're 50% of every household, but it's immense opportunity as we're seeing in Japan, which has three times the population of Korea and has nearly three to four times the ARPU of Korea, and it's just getting going here in the rest of world. In advertising, because of our focus on creating the at-scale flywheel, we've only now just begun to focus on monetizing advertising here in the rest of world and in Japan.
We grew it double digits in the quarter that we posted here in rest of world, and triple digits in Japan, but we've yet to make the investment in a direct ad sales force. A lot of the upside that I'm encouraged by comes from the fact that we've only chosen to focus and execute primarily on the paid content flywheel. Then lastly, I, I know I'm talking too long, Eric, but on crossover IP, when you have a data-driven source of hits for Netflix and Amazon Prime, you would think you would get greater upside leverage. We intentionally conservatively chose not to, because every time something crosses over and is a hit off our platform, it drives more users on our platform.
Now that we have had a capital formation event, you will see us very selectively get our fair credit, frankly, for being the source of stories that have regularly appeared globally as hits on streamers and other forms of merchandising games, but that's upside in the model ahead, and it's one of the reasons why I came out of public company. You know, last time Eric and I knew each other was, I don't know, six, seven years ago, I think, when I was still trying to turn around Zynga for Mark. I came out of public company retirement because I think this thing's a winner. Maybe not well understood yet by The Street and all of you, but I'm extremely excited about all three of the levers for growth in the business.
Great, great stuff on the segments. I did wanna come back to one point you made there, David, which was some of the noise that came out of the first earnings report.
Mm-hmm
-with respect to FX. Maybe, talk a little bit about WEBTOON's FX exposure, how it can impact revenue growth, and what assumptions you were trying to communicate around earnings for FX for the remainder of this year?
Yeah. So first, every global tech company talks about reporting constant currency as a better measure of business health, and we're no different. But one of the things that's probably less understood about us is that we are more exposed to the yen and the Korean won than most. So I think in the quarter release, while candidly, the 11% constant currency growth, the net profit/net loss performance, the $22.4 million of positive adjusted EBITDA, was higher than every expectation I had as the CFO and what I provided sell side. I think I probably needed to do a better job explaining that you can't look at the $321 million USD headline number versus USD.
You've got to look at it on a constant currency basis, particularly if you see a thirty-seven-year low during a particular period of the yen versus the USD. One of the reasons why I focus so much on disclosing so much on constant currency is I'm internally hedged largely on the bottom line. My $22.4 million positive adjusted EBITDA, which is to great upside versus expectation, my performance in Q1, which was also higher than expected, is because I receive revenue in a currency and I pay it out in the same currency. We really are a global business. So perversely, when I look at what I released, I thought I had over-delivered not only every financial metric versus my expectation. I thought 41% first half ARPU growth without meaningful investment in the whole rest of the world, 2%, nearly 1.9%.
1.9% top-of-funnel MAU in all of the rest of the world in the first half without investment was a good sign that I should make some prudent investment, which is what I guided to in Q3. Clearly, I did not communicate this well, because I am more pleased with my results than expected, and I thought I was investing into strength. But as you can tell from the stock, even today, The Street investors may not fully understand our business, and that's my job. That's one of the reasons why I'm here, to try to make sure I convey properly the actual dynamics of the business we have.
So one of the things you talked about earlier, David, was, you know, the initial genesis of the company and what was trying to be built, and I want to bring it back to content creators and that part of the marketplace you're building. Talk a little bit about the diversity of creators you have today, the investments you're making to scale creators as a community going forward, and how some of the relationship between the platform and creators continue to evolve.
Sure. Well, first, let me give you a sense of the numbers, and then let me walk you through the life of an example of a creator. So we have roughly 24 million global creators, and they're all throughout the world. And they're primarily focused on seeing if, as amateurs, the story they want to tell could have a voice. Why do we love that? We love that because it creates incredibly surprising, incredibly inexpensive sources of great hits that no one can predict or purchase. It's not. I don't have merchandisers who say, "This is what's gonna be hot next year," like I used to have when I was in other businesses. I have a global market signal and an at-scale source of constantly flowing new content, that we use data and AI and market signal to predetermine through results what to expand.
Let me give you two examples. There was a kindergarten teacher named Ingrid Ochoa in South America. She loved being a kindergarten teacher, but she thought she had a story to tell. Little did we know, little did she know, that she could go to our platform, which our amateur platform here in the U.S. is called Canvas. We make it super easy. It's taken us twenty years to figure out how to make it super easy with data and AI and anti-piracy and tools, to allow any amateur to see if they have a story that's a hit. She tells the story, we see. Rachel Smythe, New Zealander in New Zealand, graphic designer, thinks she has a story to tell.
I never would have predicted that a romantic comedy-skewing story about Greek mythology would one day become a global hit on our platform, would be a New York Times bestseller, and it all came from her starting as an amateur, one of those twenty-four million amateurs, that when we see there is a story they have that has heat, we go to them and say, "You should be a professional creator. Congratulations. With us, you can go global in multiple languages, and who knows?
Maybe you, too, can win awards like many of our professional creators." So that open source of UGC content and creators now reliably powers hits, where we typically agree to fair share results as a professional creator with the creator, and we get exclusive, digital, distribution rights on our platform, oftentimes with shopping rights when they become a hit on crossover platform. It's taken us some time, but we now have enough creators and enough data and AI to be able to reliably power our own source through our ecosystem of stories that are unexpected and delight in a way that we would never have bet our own capital on. We let the market and the flywheel determine the next hit.
Okay... You talked a little bit earlier about advertising, and one of the things we've talked about in our work is that's a fairly wide gap between consumption and monetization on the platform, and obviously, advertising can be aimed at that. Talk a little bit about what you're building around advertising, and how investors should be thinking about scaling revenue monetization on top of what you're trying to build in the years ahead.
Yeah. First, I wanna be clear that we are just beginning our journey in advertising, but let me start with what the opportunity is. If you look at the fundamentals of any advertising business, it's about the scale of the audience at play, the attractiveness or not of the demographic, the level of engagement, and how closely you can monetize their interest graph. Just any business. Unlike a lot of other digital businesses, a lot of other social networks, a lot of other mobile gaming businesses, we have some unique hallmarks. First, you know how many MAU we have.
The engagement of 30-60 minutes per day, the difference here is, it's 30-60 minutes on average per day, but the content isn't one mobile game that they might like for a period of time, it's, it's a flow of, as I disclosed, 120,000 new titles and stories that appear from our creator ecosystem. So this flow of stories means that if I choose to monetize on, say, a particular story that Maddie loves, let's say I'm showing her a high CPM video ad for a brand that I know she's gonna like, 'cause I know what type of story she's in love with, the characters of the story, the genre of the story, and I give her the opportunity not to pay that $0.15-$0.70 for that next episode once, well, what happens?
Maddie's delighted to watch an ad that is probably a better interest graph fit with what she loves to read. I monetize a high CPM ad, but I don't use up my paid content engine because I know from my cohort data that as she reads, she chooses to read more. And once she finishes that story, I got 120,000 coming per day, and she has greater confidence to buy access to more than one. So what's unique about this, is unlike my time in mobile gaming or e-commerce, I believe that the advertising part of our business that we're growing, while attractive financially and underdeveloped, can deepen the cohort habituation and depth in the ARPU for new markets like the rest of world and Japan. And I think we may be seeing that happen in the results we posted in Q2. Now, where are we?
We are just at the beginning. In Q2, we posted triple-digit growth in Japan and double-digit growth in advertising, but we've yet to, for example, hire an ad scale direct ad sales force. We've experimented with products, and we have a great ad tech stack, which we've learned about in Korea, but we're just deploying that now, and so I believe the advertising business is... All the assets exist today, but we are gonna patiently take our time to realize it, 'cause we wanna do it in order to deepen our paid content engine at the same time.
Okay, understood. You talked earlier about IP adaptation as well. Talk a little bit about the potential upside optionality in that business when you think about the next few years. And one question we get a fair bit of investors, is just remind folks, when content creators create content on your platform, where does the ownership and the potential for monetization of that IP-
Yeah
-sit?
One of the things I admire about our founder, JK, is he put in place a business model for IP and content ownership that was really well aligned for long-term growth, so the way our model works is, it's only when we can give a creator the opportunity to have a global voice, that we begin to fairly share the financial upside, and while we have exclusive digital distribution rights on our platform often, what we do is we've created shop rights for when they have a hit that Netflix or Amazon Prime or a gaming studio want.
That was very prescient, because when you think about, you know, we have a very strong AI technology presence, and when you think about all the imagery that we can use to help our creators draw better with auto draw features, for example, having prenegotiated this ownership structure means that it's easier for us to go to them and say, "Okay, we may have the largest ownership of digital imagery and stories globally. Let's work together on this AI product where we both benefit," as an example.
We like to tell our creators that we give them the opportunity to own their content, but that we agree to fair share results and share in the distribution revenue benefit of us being a very big factor in their global success, either through data and AI, or the fact that we have a ready market in 150 countries, or the fact that we have relationships with all these other off-platform partners for which we have a proven history. There was an article written, for example, in Korea recently, that the journalist suggested that we power 50% of all the Netflix hits, for example, in Korea, as one example of this potential. I do not like guiding on hit-driven businesses. Eric used to beat me up along with Lane when I was at Zynga.
I don't like buying studios because they had one hit, hoping that they'll create another hit. I very much like to keep as upside anything that's a crossover, somewhat hard to predict in a given quarter hit, and that's largely been our philosophy. I think the long-term potential of the crossover. Listen, we have an ongoing evergreen source of stories that are vetted with AI, with data, and we have market signal to know which parts of the world enjoy it. I think we can be a great solution for the entertainment industry, but I don't count on it. That's gravy in the model, because every time something becomes a great film or a great movie, it also powers the fundamental flywheel I have on our own platform. So we consider it a positive externality in the model, but I'm very excited about it.
Come to realize in the mid to long term, probably not something I would advise or guide to in a given quarter.
Okay, understood. One other thing that I think is a good way of potentially level setting for investors, we've talked about your geographic mix.... We've talked about your revenue segment mix. There are outputs of that that can lead to the evolution you're on with respect to gross margins.
Yeah.
Can you talk a lot about the inputs and outputs of gross margin, and things investors should be keeping in mind when they think about the long term and the evolution of gross margins for the business?
Sure, so if you think about the Q2 gross profit margin of 25.9% as posted in the quarter, what are the variable expenses for a business like this? Well, first, you already know about the fact that we fair share creator rev upside, call that creator rev share. And then there are other typical fees you would find for any digital business. Things like app store fees or access to mobile types of devices. One thing I would want to point out is, where is my leverage? Let's talk about it within paid content, and let's talk about it across the business model.
Every time I create an opportunity for a piece of content that originated in Korea to the rest of the world, because I'm such a large factor in the success outside of the original market, I do not have to pay the same variable rate of expense. So just growing outside Korea is leverage for me, and it's frankly, still upside opportunity for global creators who normally wouldn't have the ability to have market presence in parts of the world that they never could have access to, or the AI tools or data. And then, while that's true, every time I recruit a local ecosystem that's new, say, you know, LINE Manga, it was the number one consumer app for two to three months in Q2. We talked about seventy titles that we cultivated in Japan from local creators.
That, too, has a better profit profile than the original structure as contemplated twenty years ago in Korea, and then finally, when I think about how I monetize advertising across crossover IP, remember, both those businesses are built off of the expense already paid for in the paid content gross profit. Like, the audience, the flow of content, that is paid for already in the paid content model. So the relative contribution to profit as a company, if I realize the potential I've described in advertising and over crossover IP, is significant leverage to the company. In terms of below-the-line expense, you know, we have an incredible body of technologists in a part of the world that I consider to be the most efficient and maybe the most effective. I don't need to scale my R&D and scientists proportional to the growth of the company.
Our assets from an R&D and an AI standpoint are important, but I don't need to grow that expense as I grow my top line, so from my standpoint, this is an asset-light model, built-in leverage through geographical expansion of our own paid content engine, with upside as I realize growth in advertising and crossover IP. All of which I know is sounds great, and proof will be in quarters I release, and I'm humbled by the reaction to my Q2 release, which again, I have to say, I thought I over-delivered every single metric, including non-GAAP metrics, but here we are, and I just have to continue to post results, I guess, to help educate all of you on the business I think we have.
One of the things, David, you've been very clear about as a company, is that you are very much focused on growth as opposed to optimizing for margins. But we obviously live in a world where investors continue to want to see margin trajectory and margin progression. Talk a little bit about the dynamic inside the business of prioritizing growth, but also trying to deliver on margin trajectory and margin progression.
Yeah
When you look out over the next couple of years.
I want to talk about the three geographical components of the business. I view Korea, but again, look at Korea for the first half. Korea for the first half of 2024, its top of funnel was down 1.3% only on a constant currency basis. Its ARPU is flat to up 0.8%. Korea is stable. It's 50% population. It's an important role, though, from a margin standpoint, because it's got a great source of content that can be exported, as I mentioned, at a better profit rate for global consumption, and can speed up adoption of my flywheel as I create it in the rest of world, and I create it in Japan. Japan is also a great market.
It's ARPU at $24, which is higher than the $6.50 we disclosed in rest of world, or the roughly $7-$8 that you see in Korea. There's just a history. You know, it's three times, obviously, population size of Korea, but there's just rich consumption there. So as a consumption market, I'm pleased, but from a creator market, it has the same potential to export content, now not just in manga, but in every genre globally on our platform. I think that's also important growth and leverage combined on the bottom line. Then there's rest of world. You know, I'm used to having to talk about customer acquisition costs and LTV, buying really expensive MAU top of funnel, as I mentioned, shaking it out, hoping somebody will like a game or buy an e-commerce piece of merchandise. This is a different business.
I know when I'm exporting or launching a hit with data. I can choose to more responsibly invest behind when something is becoming, like, on Amazon Prime, a hit in January. We saw when the hit happened off our platform, it drove interest on our platform. Those are the moments I use to invest at, I think, a much higher rate of financial return to grow top of funnel, but also to drive to the bottom line. One of the things I'm concerned about is I guided Q3 to have an Adjusted EBITDA of -7.7 to 10. And many view that to be a hole in the leaky bucket of profit. I did not disclose anything like that.
I talked about the fact that I thought we had earned the ability, having over-delivered Adjusted EBITDA, to invest for the mid to long term because of the strong performance we saw in Rest of World on ARPU and on MAU. Because I think this business, my conviction is this business will do both. You will see, I believe, this business grow the top line and improve its profitability as a function of the business model we have. Obviously, depending upon management's ability to execute well, but the inherent business model, I believe, has that potential, and we'll just have to demonstrate it to all of you.
Just building on that last answer, which very much focused on the investments you wanna make in the business. Broadening the question out to the wider capital allocation strategy, you know, organic growth, inorganic growth through M&A. You have done some M&A-
Yes
-as a private company, versus potentially returning capital to shareholders.
Sure.
How do we think about that mix going forward?
From a shareholder value optimization and a capital model, first, just you know this, but you know, we don't have significant leverage on the balance sheet. I have not disclosed a need in sources and uses to the IPO process of you know, the nearly $527 million of cash that I disclosed on the balance sheet. I didn't disclose that I needed to invest it for tech debt or any issue on the core business. And if you believe that my performance in the first half, where I had you know, essentially $40 million of positive Adjusted EBITDA, is reflective of the business, there's not a need to use the balance sheet to artificially address any issue that I've disclosed to date.
Having said that, the M&A space for an emerging growth global business like ours is very interesting, and we are increasingly aware of different possibilities to create shareholder value. We haven't disclosed anything, nor do I plan on being dependent on it, but, you know, we will always be open to and be looking for ways to create a catalyst for the shareholder value growth that I just described, and I think that the space is quite dynamic. If you listen to what I've said about our role in creating content and hits on a data-driven, more reliable basis for others, you can understand why the broader ecosystem is of interest to us, but so far, we have not disclosed any specific strategy on M&A or share buyback.
We're very much just focused on executing organically, and we think there's plenty of shareholder value in that alone.
Okay, last one before we lose you in the next minute or two. If we're sitting here a year from now, what are you most excited over the next 12 to 18 months? What are you sort of holding yourself to in terms of goals or milestones when you think about executing with a look towards the next 12-plus months?
First, I want, broadly, our public company investors to have a clear understanding of the business model and to judge us based on the actual performance of the company, good or bad. That is an absolute objective of mine as the CFO of this company, but to be more specific, I think you should see signs of proof in all three of the areas. Geographic expansion in paid content, proof points that the North America and Japan, Rest of World advertising upside is becoming real. Demonstration that I'm getting more upside for the reliable delivery of cross-IP stories and hits on other platforms, all three, and then, with regard to financials, I've said that I believe the potential of the business model is to grow and to improve profitability, well, that should become evident in results over time, so my aspiration is to prove it all to you.
And I like proving people wrong. So while I don't like today's stock price, I'm excited to come back and see all of you, regularly, to try to help explain the story.
David, I always appreciate the opportunity to chat. Thank you for being part of the conference. Please join me in thanking WEBTOON for being part of the conference this year.