Earnings Labs

WEBTOON Entertainment Inc. Common stock (WBTN)

Q3 2024 Earnings Call· Thu, Nov 7, 2024

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Transcript

Operator

Operator

Thank you for standing by. My name is John, and I'll be your conference operator today. At this time, I would like to welcome everyone to the WEBTOON Entertainment Third Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Soohwan Kim, Vice President of Investor Relations. Mr. Kim, please go ahead.

Soohwan Kim

Analyst

Good afternoon, and thank you for joining us. As a reminder, our remarks today will include forward-looking statements, including those regarding our future plans, objectives, expected performance, in particular, our guidance for the next quarter. Actual results may vary materially from today's statements. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings, including those stated in the Risk Factors section of our filings with the SEC. These forward-looking statements represent our outlook only as of the date of this call. We undertake no obligation to revise or update any forward-looking statements. Additionally, the matters will discuss today will include both GAAP and non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to the most directly comparable GAAP measures are set forth in our earnings press release. Non-GAAP financial measures should be considered in addition to, not as a substitute for GAAP measures. Joining me today on the call are Junkoo Kim, Founder and CEO; David Lee, CFO and COO; and Yongsoo Kim, Chief Strategy Officer. With that, I will now turn the call over to our Founder and CEO, Junkoo Kim.

Junkoo Kim

Analyst

Thank you, everyone, for joining us today. I'll make a few brief comments on our third quarter performance, and then David will provide more detail on our results and outlook. For my full thoughts on the quarter and our path forward, please refer to the shareholder letter posted on our Investor Relations website. The third quarter was a strong one for WEBTOON, marked by 9.5% revenue growth on a reported basis and double-digit growth on a constant currency basis, coupled with solid profitability and supported by deepening engagement from our user base. In this first full quarter as a public company, we continue to advance our strategy and mature and streamline our operation as we further scale globally. We also reached an exciting milestone this year as we celebrated our 10th anniversary in North America. Looking back to when we first launched in this geography a decade ago, WebComics were unfamiliar to most comic fans in this region. But now we have seen the popularity of WebComics continue to grow outside of Asia. This was especially clear when we attended Comic Con in both San Diego and New York as fans came out in droves to support their favorite WEBTOON creators in person. This event proved that WebComics have become a significant global content medium with fandom that rival traditional comics. Growth in Q3 benefited from an increased use of technology, developed by our top-notch AI team, we believe our recommendation engine takes a cutting-edge approach to optimize the user experience. As a result of applying this technology in Korea, the number of weekly episodes viewed per user increased by 3 points year-over-year in what is already our seasonally strongest quarter. We also saw great success in Japan, which was primarily driven by optimization and improvement in our existing personalized…

David Lee

Analyst

Thank you, JK, and thank you, everyone, for joining us. Let's talk a bit about how our global flywheel powered the strong results we saw in the third quarter and for the first 9 months of the year. During the quarter, we grew revenue 13.5% on a constant currency basis with growth across all regions and revenue streams. Our reported revenue was up 9.5% year-over-year as a result of strength in paid content and advertising, partially offset by our exposure to weaker foreign currencies. As we grew our paid content business outside of Korea, we also gained greater structural leverage on our gross profit, which expanded well over 300 basis points year-over-year. Adjusted EBITDA grew to $28.9 million in the quarter, a significant increase compared to the same quarter of 2023. This was the result of our strong gross profit and effective cost controls, including a focus on higher returning marketing spend. As one example, we recently launched a partnership with Duolingo, which is increasing our brand awareness and exposure to our platform. Net income of $20 million in the quarter also increased significantly compared to a loss of $11.5 million in the year prior, driven by notably improved gross profit as well as increased interest income and income tax benefit. As a result, our adjusted EPS for the quarter was $0.22 compared to $0.03 in the prior year. Turning to operational health. It's important to note that our MAU base consists of both web users as well as app users, and we've been increasing our focus on the app over time. This is a strategic priority of ours as we find the app drives greater user engagement and further monetization. And in Q3, while we saw a decline in MAU overall, we were pleased to see that users on…

Operator

Operator

[Operator Instructions] Our first question comes from the line of Doug Anmuth with JPMorgan.

Unknown Analyst

Analyst

This is Dae on for Doug. First one, could you explain a little bit more on the rationale or I guess, your decision to prioritize app users in Korea and in the U.S. I guess in the U.S., you're not monetizing web users, but in Korea, I thought web platforms do have a benefit of lower platform costs. So I was curious like why that decision? And then as a follow-up, could you give us an update on how you're progressing on building up your own direct sales team in Japan and in the U.S.

David Lee

Analyst

Sure. Thanks for the questions. First, just to take a step back, it's important that when we look at the health of the business, starting with MAU, the reason why we look at it on a web and an app basis is the app gives us the opportunity to apply more levers to improve engagement to maintain higher rates of retention and monetization. I mean the clear example you note in Rest of World is that we primarily do not monetize from a paid content standpoint on the web at all. But even with regard to our results in Korea, the 50% penetration we have in Korea creates an opportunity for us to constantly apply new technology like the AI personalization engine we mentioned that rolled out in Korea as well as other product innovation. So when you look at the business, our overall app MAU -- the portion of our MAU that is more retentive, that has greater levers applied, and that we think monetize better in the quarter actually modestly increased 1% year-on-year, reflecting, we believe, the health of the business. Now to answer your question on Korea, when we look at Korea, you'll note that there is still a strong performance on overall revenue of a positive 1.7%, driven by ARPU, right? We talk about how ARPU is so critical, particularly when you have such dominant -- we are the digital Cleanex of storytelling in -- 50% penetration is strong. So when you have a business this strong, your focus needs to be on continually improving the experience for the consumer and bringing new content in ways that they can find. And so this ARPU increase driven by product improvements to the app, the example we give is this AI-driven personalization engine, but it's just one example…

Operator

Operator

Next question comes from the line of Mark Mahaney with Evercore ISI.

Unknown Analyst

Analyst · Evercore ISI.

This is David on for Mark. Could you talk a little bit about some of the specific initiatives that you're using to drive users from the web to the app? And is there any room to improve the conversion tools to reduce churn?

David Lee

Analyst · Evercore ISI.

Well, part of the -- first of all, the product experience is different by region. I think when you -- for example, if you're using our product here in the United States and you're either on our Wattpad or our WEBTOON U.S. product, the experience that you have on the app is the fundamental product differentiation. We have levers to deliberately drive traffic from the web to the app. We've been underway, and we had reported on in the last quarter that as an ongoing effort. But this is not a hard cut over the way you see in subscription business. Remember, this is a business where consumers are free to find the content they want. So, think of this as an encouragement versus a hard cutover, and it's primarily driven by a better experience and better product that they can find on the app. In terms of -- I think your question is about retention. This is not like many other businesses in consumer tech, where you're adding to the top of the funnel passive eyeballs with the hopes that they monetize. Here, you have a business where we let the consumer explore for free intentionally because when they choose to make a micro payment, remember, these are $0.15 to $0.70 on average purchases for an episode, an episode they want, we can see as they access more and more episodes that their ability to deepen their relationship to us and cohort data means that their ARPU will increase over time. So for us, this is less about adding to the top of the funnel and improving retention as it is making sure we're flowing content for them to self-select into stories they love that increases their confidence to access more episodes over time because that's our payment structure versus sometimes I think when you look at other businesses, you're thinking about it either as a social media business or a subscription business where you have a forced migration from either a web to an app, that's not our business. We have the benefit of having 120,000 new titles arrive every day, and it allows us to be more organic in our movement from web to app as well as more retentive.

Unknown Analyst

Analyst · Evercore ISI.

Got it. That's really helpful. And if I could with a follow-up. Could you please remind us of the underlying drivers behind the Q3 seasonality in Japan? And are there any other similar seasonalities in Korea or any of your other major markets?

David Lee

Analyst · Evercore ISI.

We've only highlighted in Japan that the overall category consumption of Manga and its category has a high point in the month of September in the quarter. Beyond that, it is not something we've articulated that we're driving. We benefit from it, and we capitalize on it. Yongsoo, JK, anything you want to add to the seasonality question?

Yongsoo Kim

Analyst · Evercore ISI.

I think that covers it from our standpoint.

David Lee

Analyst · Evercore ISI.

The other one that we want to mention is that when people have more time, they have the ability to consume more content. So over certain holiday periods such as the summer period, we do also see more Q3 consumption of paid content beyond the phenomenon that we articulated in Japan. But other than that, there aren't any major significant increases that we've disclosed.

Operator

Operator

Our next question comes from the line of Andrew Marok with Raymond James.

Andrew Marok

Analyst · Raymond James.

I guess one on marketing. How would you characterize the marketing environment right now in terms of ROIs? And have there been any kind of particularly accommodating areas or channels that you've chosen to lean into?

David Lee

Analyst · Raymond James.

Yes. Marketing has been a very interesting area for us. We -- first, on marketing. Sequentially, you'll note that in Q3, we did increase our marketing by 40% in the quarter versus Q2 to the $9.2 million that you mentioned. But interestingly, it's actually been flat versus a year ago as we've increasingly found ways to deliver higher revenue with higher returning marketing spend. The 2 examples that we talked about, one of which is in Japan, where the team has developed a strong ability to regularly find high-returning investment in marketing that's delivered top of funnel and bottom line results. But the other -- the specific example we talked about is in Rest of World, when we have the ability to partner with someone who has a similar audience, remember, our audience is quite attractive in Rest of World. It skews younger. So Duolingo is the example that we mentioned, the campaign, the mini-series we launched is called Duo Unleash. That actually occurred here in the beginning of Q4. But it's an example of why in our guidance, even though we deliver a positive adjusted EBITDA midpoint range of $11.5 million in our guidance, we intend to spend 42% more in marketing in Q4 than you would see a year ago because we're finding more and more of these high ROI opportunities that combine product, content and partnership. I think that's a good example. And it's also important to note that we've placed strong leaders now. Yongsoo Kim, as the leader of now our business in U.S. WEBTOON is driving this push for higher returning investment in marketing because we see the opportunity there. So we're very pleased with our return. It happens to be a great adjusted EBITDA benefit in Q3, but that was not our objective. Our objective was really to spend at higher return levels when we have the right combination of product and partnership.

Andrew Marok

Analyst · Raymond James.

Really appreciate the detail there. And maybe one that's sort of connected, but you mentioned timeshare in an earlier answer. I guess one, to the extent that you're winning time, do you know where that other channels you're winning time from? And 2, as you're looking at some of these partnerships with other digital media entities like Duolingo, is there even a kind of partnership opportunity in timeshare?

David Lee

Analyst · Raymond James.

Well, first of that, in terms of timeshare, I think what we've talked about is the fact that right now as the category leader, JK created or founder created this format in this business. We're the leader, and we don't compete at the expense of anybody else's business. We don't see the need to steal share because we're establishing a new format. In fact, our digital stories are a little [Technical Difficulty] right? They show up. We have 100 examples of them becoming rich adaptations. You heard JK talk about Sweet Home in Korea. You heard us talk about our Crunchyroll developments with Tower of God Season 2. So for us, we're in a privileged position of being able to expand the category we created. But with regard to your question, the 2 examples we've talked about in Rest of World do include very attractive consumer bases that are interested in our business and there's a Discord was the one that we mentioned in the previous quarter, and now we're talking about Duolingo. When you have an attractive engaged consumer base that's spending 30 to 60 minutes per day on our stories, it gives us the ability to do this idea of cross-promotion and partnership with other very interesting consumer tech platforms. But to be clear, we don't really feel the need to share or compete for time. Our consumer is deeply engaged because 70-plus percent of them say in, for example, North America, they can't get the stories we offer anywhere else. And so that's the reason why we don't really need to compete for time.

Operator

Operator

[Operator Instructions] Our next question comes from the line of Mark Mahaney with Evercore ISI.

Unknown Analyst

Analyst · Evercore ISI.

Sorry, this is David again for Mark. Would you mind sharing some of the components of your IT adaptation costs?

Junkoo Kim

Analyst · Evercore ISI.

It's a good question. At this point, we have not broken down in disclosures the components. But we have talked about the fact that we have a relatively derisked structure. We don't heavily bet large amounts of CapEx. We're not creating studios that are changing the fundamental use of cash. You know that we're generating cash even as we deliver our pipeline. So our business is one where we have data around stories that we know are hits and can more reliably, we think, identify ways in which they can cross over to rich film adaptation. The examples we gave you of True Beauty, Tower of God Season 2, Sweet Home, these are on Netflix and on Crunchyroll are Korean examples. But I'd also highlight in Rest of World, there are great examples for example, of Amazon Prime in Europe, Love Me, Love Me in Italy or with our Spanish release of Sigue Mi Voz, there are examples across all of our regions where stories begin in our platform and then find life almost inexpensively and organically with the help of our Studio, and WWS studios. There is some expense that we can deliberately choose to spend, but these are development expenses like developing a script. We're not interested and nor do we need to make heavy, heavy investment. That is usually borne by the folks who are going to bring the crossover IP to market at this point. And there's one -- let me just turn it over to Yongsoo because he's been patiently waiting to offer a point of view on this statement. Yes.

Yongsoo Kim

Analyst · Evercore ISI.

For the IP adaptation cost, actually, in our IP adaptation business, in most cases, our business model is licensing or pre-products. And in that case, we don't have actually any actual cost for them. Honest, we have -- we need to spend some money for the development, the packaging or development of script. We have some cases of co-production. So in that case, we have -- we take the different cost structure, but that is not our major business model for IP adaptation side. And actually, I can add some more points to address your earlier question about what kind of initiatives we are taking to attract more users into app from web. And in some cases, then we actually download our latest episode only in the app first, and our app user can enjoy the latest episode earlier than web. That is a very powerful tool and we can attract more users to the app product.

Operator

Operator

[Operator Instructions] As there are no further questions -- my apologies. It seems we have another question. Our next question comes from the line of Benjamin Black with Deutsche Bank.

Benjamin Black

Analyst · Deutsche Bank.

Could you just talk a little bit about the sort of the customer acquisition environment, both in Japan and also in North America? So just maybe dig a little bit into the strategy to effectively acquire more users?

David Lee

Analyst · Deutsche Bank.

Sure. I think this relates a bit to some of the commentary earlier on how we are leveraging our higher returning marketing. For us -- and let me just cover -- you may not have heard what we said before. We are very pleased with our performance. When you see our app MAU increased 1% with essentially flat marketing expense in the quarter, it's the reason why we have confidence to include in our forward-looking guidance for Q4 this 40% -- 42% increase in marketing in Q4 year-on-year and still deliver really strong midpoint adjusted EBITDA of $11.5 million. The example we're giving is to leverage the attractive engaged demographics of our user base in partnership with others. So you recall, Ben, we talked about Discord last quarter. The example we're giving that is going to be in Q4, it just began in October is our partnership with Duolingo. We call it Duo Unleashed, where we have the ability not just to have to spend on our own, but to partner because of a mutually attractive audience and engagement, which improves the ROI as we increase the MAU on the business. I think that's our best example of how we intend to continue to grow versus more lower ROI passive spend on top of funnel, which is thankfully not something that we have to do to deliver the strong revenue performance you see in the quarter.

Operator

Operator

As there are no further questions at this time, this concludes our Q&A session as well as WEBTOON's third quarter 2024 earnings conference call. Thank you all for attending today's session. You may now disconnect. Have a pleasant day, everyone.