WEBTOON Entertainment Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Junkoo Kim: Third quarter was strong with 9.5% revenue growth (reported) and double-digit constant currency growth, solid profitability, and 10th anniversary in North America. Highlighted growth in WebComics popularity outside Asia and success with AI recommendation technology in Korea and Japan, as well as IP adaptations like Studio N's Sweet Home Season 3 on Netflix, Crunchyroll adaptations of Tower of God Season 2 and True Beauty, and European webnovel adaptations with Amazon Prime.
• David Lee: Global flywheel powered strong results. Revenue grew 13.5% constant currency in Q3, with paid content up 12.7% constant currency, advertising up 24.3% constant currency, and IP adaptation up 5.3% constant currency. MAU base shifted focus to app, with app users increasing 1% in Q3. Profitability improved with gross profit up 26.7% to $91.4M, adjusted EBITDA at $28.9M, net income at $20M, and adjusted EPS at $0.22.

Segment Performance

• Paid Content: In Q3, constant currency revenue growth was 12.7%, with year-to-date constant currency revenue growth at 13.2%. ARPU saw 14.7% growth in Q3 and 14.1% year-to-date on a constant currency basis, driven by deepening engagement and spend from paying users globally, particularly in Japan.
• Advertising: Posted 24.3% constant currency revenue growth in Q3 year-over-year, with double-digit growth across all regions. Year-to-date, advertising revenue growth on a constant currency basis was 17.1%.
• IP Adaptation: Q3 constant currency revenue growth was 5.3%, with year-to-date growth at 16.5%. Growth was driven by Japan and Rest of World, though Korea had project delays impacting Q3 growth which may extend into Q4.

Guidance

• Fourth Quarter 2024: Expected constant currency revenue growth in range of 10.3% to 13.3%, translating to revenue between $375M and $385M. Adjusted EBITDA expected in range of $9M to $14M, with margin 2.4% to 3.6%. FX rate movements could impact revenue and EBITDA; e.g., a 5% move in USD vs KRW/JPY could impact revenue by ~$20M and EBITDA by ~$2M.

Risks

• Rest of World MAU decline due to a country banning global content sites during Q3, expected to impact Q4 fully. FX rate movements subsequent to Q3 end could negatively impact revenue and adjusted EBITDA as seen in recent currency fluctuations.

Question and Answer

Q: Could you explain the rationale for prioritizing app users in Korea and US, and update on direct sales team in Japan and US?

A: David Lee stated app provides more levers for engagement and monetization. In Rest of World, direct sales team is being built for future upside, with examples like partnership with Duolingo for brand awareness.

Q: Could you talk about initiatives to drive users from web to app and retention?

A: David Lee mentioned better product experience on app drives traffic from web to app, with encouragement rather than hard cutover. Focus on better experience and product, not forced migration like some subscription businesses.

Q: How would you characterize marketing ROI and accommodating channels?

A: David Lee said marketing spend is flat vs year ago but delivering higher returns. Highlighted Japan's high-return marketing investment and Rest of World partnerships like Duolingo's Duo Unleash campaign, with increased marketing spend in Q4 for high ROI opportunities.

Q: Could you share components of IP adaptation costs?

A: Junkoo Kim and Yongsoo Kim explained IP adaptation costs include development expenses like script development, but business model is mostly licensing or pre-products with minimal heavy CapEx, leveraging existing data on hits for organic crossover to film adaptation.