Naver Corporation (OTCPK:NHNCF) Q2 2022 Earnings Conference Call August 4, 2022 8:00 PM ET
Company Participants
Min Kim – Investor Relations, Director
Soo-yeon Choi – Chief Executive Officer
Nam-Sun Kim – Chief Financial Officer
Conference Call Participants
Minuh Cha – Goldman Sachs
Dong Hwan Oh – Samsung Securities
Seungjoo Ro – CLSA
Jae-min Ahn – Investment & Securities
Stanley Yang – JPMorgan
Soyun Shin – Crédit Suisse
Min Kim
Good morning. I am Min Kim NAVER’s, IR Director. Thank you for joining NAVER’s Second Quarter 2022 Earnings Presentation. Joining on the call today we have CEO, Soo-yeon Choi; and CFO, Nam-Sun Kim.
Please note that the earnings results are K-IFRS-based provided for the purpose of timely communications and are yet to be audited by an independent auditor and hence are subject to change after the review.
I will now turn it over to our CEO to present on the business highlights.
Soo-yeon Choi
Good morning. I’m Soo-yeon Choi, the CEO. I understand that investors are concerned about NAVER’s domestic business growth due to the recent global economic slowdown. Macro headwind is being faced by most of the Internet platform companies with the risk of growth slowdown.
I expect similar pressures to weigh down on our key businesses of ad commerce and fintech, but we will do our best to minimize the burden for our partners and businesses based on NAVER’s ecosystem of search, commerce, payment and reward points and we do our utmost to outperform the market.
Dutch platform, which accounts for half of our total revenue was up 9.3% on year and 6.5% on quarter sustaining a solid uptrend. Despite the base effect from last year’s performance ad innovation and steep growth and external uncertainties. Our growth rate was above pre-COVID average, which is quite meaningful.
Recently due to changes in privacy protection policies for iOS in North America, targeting capacity has been eroded and revenue growth slowed for platforms that was mostly based on discovery. But NAVER despite having extensive user data as part of its core business, the search platform did not depend on targeting due to its policy reasons and made our business model not at all sensitive to user behavior in the front end of the discovery process.
As global tech companies demonstrated their robustness in the face of global slowdown, NAVER has also shown stability of its surcharge performance and its business model. We will further advance the ad platform for performance ad and expand ad services, while launching new products that meet evolving advertiser requirements with a view towards exploring new drivers for future growth.
Next is the domestic business update starting with fintech. Total GMV of NAVER shopping in Q2 surpassed KRW10.3 trillion, growing 20.8% on year. Smart Store GMV was up 16.9% on year, reaching KRW6.6 trillion and GMV including clean, travel and booking was up 112% leading the growth.
While to date with all offline transition accelerating and e-commerce market growth was mostly fueled by search-based services but now preferences and user demand become more diversified and granular offering discovery and creation-based services within a special vertical is becoming as important.
To this end, NAVER Commerce is also focusing on upgrading high-growth verticals and new services that include brand service, live commerce and NAVER grocery. Brand store GMV was up 86% on year to KRW730 billion. Through a continuous solutions improvement and offering of segmented tools and better loading of products, 190 additional brands from golf luxury and beauty categories were newly onboarded with a total of 965 brands actively using the brand store as of today.
As we move on to the endemic with more outdoor activities, NAVER booking GMV is rising in leisure concert and exhibition and beauty with demand for air travel, hotel and tour also rising, bringing combined category GMV of 2.1 times year-over-year to record high KRW1.1 trillion.
Cream, which is platform for limited edition product has seen non-sneaker category mix rise above 50% with GMV up 2.4 timesY-o-Y reporting KRW350 billion. We are rationalizing the fee scheme to meet the global standard and on top of growth, we will improve profitability.
To share an update on the collaboration with logistics partners including CJ Logistics as part of the way to broaden the grocery and also goods category, 61 brands as of Q2 end newly joined CJ Logistics fulfillment services, bringing the number to a total of 186 companies. Coverage for quick delivery has gone to 21% of the entire FMCG category. We will endeavor to reach 50% coverage as per our mid to long-term plan.
By speeding up collaboration with our strategic partners and upgrading solutions such as delivery at a designated time. We plan to quickly grow the volume for quick delivery as well.
Our CFO will provide more details but underpinned by the unrivaled platform connecting NAVER search, shopping and pay, earnings capacity of the commerce business continues to be robust. Membership and pay point reward is used as strategic investment into broadening the ecosystem for users and entrepreneurs, which is fed back into the NAVER ecosystem, triggering repurchases and building loyalty and working as a growth engine across the entire NAVER.
We will continue to maintain such investment stance, but since it’s been two to three years only, it may be time for us to revisit the point scheme in light of diversified user behavior. We will optimize membership benefits and use men — use and manage expenses more efficiently so that commerce may gradually level up its profitability.
NAVER Pay GMV is also sustaining its up trend, driven by growth from commerce and NAVER membership. Q2 GMV surpassed 12 trillion growing 32% year-on-year. We onboarded a new large merchants like IKEA, Zara, KORAIL and LOTTE Super driving off platform GMV to KRW4.6 trillion, which is up 60% Y-o-Y, which is driving the total GMV trajectory.
In line with off-platform partner expansion, we enhanced offline accessibility by supporting on-site payment with the Watch app and by actively leveraging membership benefits will drive GMV from existing merchants. We’re also expanding fintech service lineup as well. There are 1.8 times more number of offline merchants versus online and we launched a loan product for them called Place Loan and launched an insurance product for returned goods to help Smart Store operators. As such, we will continue to support the growth of on and offline commerce players.
We also launched integrated insurance information service back in June connecting biggest number of insurance companies and in second half will also launch loan comparison service engaging first tier banking sector local bank savings bank capital and credit card companies to develop into a comprehensive platform where people can compare multiple products all at let once with ease.
As mentioned, NAVER’s competitiveness in the domestic market stems from a robust cycle of cutting across search, commerce, payments and fintech. Users with clear intent will come in through search and offline merchants are onboarded through commerce base, which we will actively utilize as a touch point and through the expansion of fintech business within the bounds of what’s permitted by law. We plan to achieve 500,000 innovative business users and 10 million MyData users by 2025.
Following a more granular level of information sharing on commerce last quarter, we wish to provide a detailed explanation on our Webtoon business structure and its profitability. Post-merger integration of eBOOK Japan, Locus and Munpia newly consolidated since Q2 is a smooth sail. We began connecting the systems of eBOOK Japan and LINE Manga and we’ll begin to expand content distribution of original Webtoon titles starting the second half.
Through the acquisition, we can reach out to web-based users who are enjoying content via Yahoo! JAPAN portal and was able to win a solid number one market position through the core marketing between the web and the application. For an efficient business expansion, we are pushing ahead with closer cooperation through task force on synergy between LINE Manga and eBOOK Japan and will further broaden the service scope through projects that eventually incorporates LINE as well.
Through such aggressive growth strategy, we were able to successfully create an ecosystem with a global total of 180 million Webtoon user base with 630,000 creators around the world creating distributing and monetizing high-quality content. Even setting aside Wattpad, the Web Novel community service, we have MAU of 86 million users as of Q2 end and 8.5 million or 10% of them are enjoying paid content.
Ratio of paying users out of the total Webtoon users is growing and in Korea, which is a more mature market paying user ratio is more than 26%. Although, the paying user mix only is a single digit for Japan and US, it is up trending and we expect there to be greater earnings potential from the global market. We are also seeing sustained growth in terms of monthly spend per user. For Korea, it is KRW9,000 per month US, KRW13,000 and Japan KRW35,000. As the number of users is growing rapidly in US and Japan, there may be fluctuations in spend per person, but it is definitely on an upward trajectory.
Driven by growth in paying user mix and spend per person, NAVER Webtoon GMV surpassed KRW1 trillion of 2021 with Q2 2022 GMV at KRW406.5 billion, which is 20% year-on-year growth. Since GMV from Japan accounts for 54% of the total and in light of the weaker yen, we can see that GMV growth is continuing at a fast pace.
Based on reasonable revenue share model, we took our ecosystem to the global market driving growth and terms of global GMV. As the global mix grows where spend per person is higher profitability of NAVER Webtoon will also improve.
We are also seeing meaningful outcomes from not just paying content, but also global Webtoon’s IP business. Through my window from Wattpad and Webtoon studio, which was established in June ranked number one in 22 countries after its release in Netflix. The studio has 120 titles in the production pipeline and hired David Madden in July a reputable Hollywood producer who had won an Emmy Award as the Head of Global Entertainment.
As such, we will give a bigger push behind production of content per screen by leveraging our own IPs. I believe we are just beginning to monetize Webtoon’s 180 million global user base. As a bonus feed global storytelling platform, we will bring growth in paying users, spend per person to drive GMV and grow global share and diversify BM into IP business and add to further elevate our top-line growth. We will show that proven Korean BM can and will work on the global stage.
Let me also brief you on the leadership change for the cloud business. Following the pandemic, platform environment has been quickly transitioning to cloud expanding the market with more competition triggered amongst global service providers. So we decided on a leadership change to facilitate both advancement of our cloud business and global expansion all at once.
Yoon Kim, who has been designated as the new head will be able to drive synergies between NAVER and cloud based on his deep understanding of NAVER technology and services. And together with Van Yu Pique [ph] will lead the growth of our global cloud platform underpinned by technical planning and strategic capabilities.
Yoon Kim is a renowned expert in data and technology who has what it takes to develop data and cloud solutions befitting the customer needs and as NAVER’s current Head of Data had collaborated with CACs and business entities in developing many solutions. As such, we are more than confident he can bring yet another leap forward to NAVER’s cloud and B2B business.
Lastly, an update on our Japanese business. Many of you would be interested in an update on the integration of Z Holdings and LINE. We have since set up a joint management system between NAVER and Softbank engaged in discussions on possible technical collaborations, but due to limited physical interactions due to COVID there has been some delay in bringing visible business performance.
As we move into a period of endemic since the second quarter management teams of both companies are engaging in close talks via in-person meetings and are discussing many areas that NAVER can contribute as a strategic partner. In particular for commerce, we will encourage four million PayPay vendors to adopt MySmartStore so that we may gain meaningful positioning in Japan’s e-commerce market.
We will do our best to share with you the synergies that we had expected at the start of the integration possibly in the near future. In the midst of a global economic slowdown and worries of corporate earnings NAVER’s performance in Q2 I believe was robust. This shows that regardless of the economic cycle as ad commerce fintech and content platform NAVER is being well-accepted and used by businesses and its users.
There may be short-term ups and downs on seasonality and external backdrop, but we are committed to creating a solid growth trajectory in both domestic and in the global markets. We look forward to your support in our endeavors.
And I will now hand it over to CFO, Nam-Sun Kim for Q2 financial highlights.
Nam-Sun Kim
Hello. I’m the CFO. I will run through the second quarter earnings results. NAVER’s Q2 consolidated operating revenue was up 23% on year and 10.9% on quarter to KRW 2.0458 trillion breaking the KRW 2 trillion mark.
Despite uncertainties and concerns over a slowdown search platform commerce and fintech led the growth, while consolidation of eBOOK Japan and Munpia for the content business drove solid top-line growth. Consolidated operating profit was up 0.2% on year and 11.4% on quarter reporting KRW 336.2 billion.
On headcount increase from the acquisition and higher partner expense with COGS from eBOOK Japan in strategic marketing activities OPM was flat Q-on-Q, but a decline in cash settled stock-based compensation expense following fall in the equity prices adjusted EBITDA reported KRW 432.6 billion and EBITDA rate of 21.1% declining both Y-o-Y and Q-on-Q.
For your information additional operating revenue and expense booked on a consolidation of eBOOK Japan and Munpia was KRW 98 billion and KRW 100.1 billion, respectively. Last quarter we promised to share more information on each of our business lines and in terms of status update and performance. So this quarter, I will present on the breakdown which is the first for NAVER.
First search platform and commerce take up greater portion of our revenue and continues to display elevated margin levels due to steep price in performance ads, which entail high level of revenue linked spend. Search platform margin declined, but revenue mix changes were eased and we expect OPM to be solid going forward.
For Commerce with membership launch in second half of 2020 and rise in promotional expenses and consolidation of CREAM and AMUSE whose bidding model is yet to be finalized, there was a gradual decline in profit margin. However, core earnings capacity for Commerce is not much different to search platform.
Mid to long-term we look forward to building efficient logistics partnerships, diversify ad and solutions revenue stream and improve cost efficiencies from membership and marketing activities. Fintech service revenue is continuing on with top-line up trend underpinned by quarterly GMV of KRW 10 trillion and we are once of the few fintech players generating profit.
Webtoon and SNOW have a big share of our content business as they grow in size both domestic and global. Loss is widening, but share of expense against the top-line is improving.
Webtoon is highly profitable with domestic separate basis operating margin of 20%, and we think global Webtoon can also reach a similar level supported by higher ARPU and take rate.
Cloud is loss making as it includes expenses from Clova and NAVER LABS, which are areas of future technology requiring preemptive R&D investment. Excluding these cloud service and works are major revenue sources with quite positive revenue levels and as outbound revenue gradually increases we expect earnings contribution on a consolidated basis will also rise.
As we separated affiliate transaction revenue with revenue from outside to represent profitability that best represents the real picture, there may be a slight difference between previous classification of revenue under five major businesses versus the revenue used to calculate P&L of each business.
In terms of the operating revenue breakdown for Q2 Search platform was up 9.3% on year, and 6.5% on quarter to KRW 905.5 billion. On the back of rate hikes and inflation and concerns over economic slowdown, as we continue to improve SA quality, and added more lineup of display ads SA and DA revenue was up 9.5% and 8.5% year-over-year respectively and 6.1% and 9% Q-on-Q maintaining a solid growth on par with the pre-COVID levels.
Considering the base effect of steep growth led by performance ad and 8.7% annual growth of search platform back in 2019, the impact from economic headwind seems limited on the search platform as of yet.
Commerce revenue was up 19.7% year-over-year and 5.5% Q-on-Q to KRW 439.5 billion. On the back of the COVID endemic offline is growing again whilst the e-commerce growth is slowing globally. But in the Korean market, total average growth rate is still quite positive.
Looking at the breakdown Commerce ad was up 16.5% on year and 5% on quarter and revenue from sales and commissions were supported by GMV growth from brand store LIVE Commerce and grocery bringing the revenue of 25.8% on year and 7.4% on quarter.
Membership revenue was up 23.1% year-over-year and 0.6% Q-on-Q. This is due to changes in formula for per day basis calculation of monthly membership. Excluding this impact, membership revenue was up 34.8% on year and 10.1% Q-on-Q.
Fintech revenue was up 27.1% on year and 7.6% on quarter to KRW 295.7 billion. And despite the base effect from payment fee cuts beginning of the year and a sustained GMV uptrend for Smart Store and off-platform payments solid growth continued.
On the back of consolidation of eBOOK Japan and Munpia, content revenue was up 113.8% on year and 41.6% on quarter reporting KRW 300.2 billion. Safe for this impact content revenue was down 4.6% Q-on-Q and this is due to increases in outdoor activities from economic reopening and base effect of IP revenue growth from Wattpad in Q1, and declining in Webtoon revenue from Japan on weaker yen.
Despite a high base of cloud projects, and the order book last year, on more references built up from finance and health care cloud revenue was up 10.5% on year and 13.9% on quarter to KRW 104.9 billion.
Next is on expense items. To make clear classification of expense items, we reclassified a portion of labor expense, which was previously included under the infrastructure expense under labor cost, and 1% basic pay reward point formerly under the partner expense was reclassified under marketing cost.
On the back of new hires to strengthen competitiveness of global content and increased in headcount from newly consolidated entities and rise in wages, development and operational expense was up 19.2% on year and 9.1% on quarter to KRW 515.1 billion. Say for a decline in cash settled stock-based compensation expense following fall in equity prices, there was 36% year-over-year, and 14.2% Q-on-Q growth.
On the back of eBOOK Japan acquisition, rise in membership expense, including TVING and accounting treatment changes for revenue partner expense was up 36.7% on year and 15.5% on quarter reporting KRW 720.1 billion.
Infra expense on the back of AI capability built up and infra expansion for greater service scope recorded a rise of 17.3% Y-o-Y and 6.6% Q-on-Q coming in at KRW 141.4 billion.
Lastly, on the back of NAVER pace reward point and membership eBOOK Japan acquisition and marketing activities undertaken to solidify global number one positioning for Webtoon. Marketing expense was up 34% Y-o-Y, and 5.7% Q-on-Q to KRW 333 billion.
As mentioned last quarter, we are looking at various ways to make membership and Pay Point related spending more strategic and efficient. We are in the process of changing some of the program policies that relate to certain services where the impact will be limited, as there is only a small sale involved. We decided last month for instance to give additional reward points for specific verticals in the Smart Store and adjust the percentage of points given which are all part of our efforts to bring efficiency while we strengthen the program.
Marketing for the content business will also have a clear focus on driving earnings by improving retention and content consumption. Due to the increase in corporate income tax and payment thereof in May, operational cash flow declined bringing Q2 FCF down KRW 70.8 billion year-over-year and KRW 445.8 billion Q-on-Q, reporting minus KRW 189.7 billion. Third quarter is typically a slow season and on macro headwinds and uncertainties related to interest rates, it’s difficult to forecast revenue growth which will weigh down on margin as well. However, through effective cost controls, including for labor and marketing costs, we will try to keep full year margin at around 16% on par with the level of the first half.
Lastly, let me run through some changes in our shareholder policy. As our announcement on shareholder return policy early 2020, there was a need for sizable use of the treasury shares. We adopted stock-based compensation scheme amounting to more than KRW 100 billion per annum to closely link up company performance with compensation. We’ve used about KRW 1 trillion worth of treasury shares over the past two years for strategic share swap and resources for acquisition.
However, under the Capital Markets Act, once may not dispose of treasury shares starting three months prior to the purchase up to six months after the buyback creating operational difficulty in implementing the SBC scheme or using the share as a means to engage in M&A transactions even if there is a good investment opportunity.
Therefore, we decided to keep the total size of shareholder return as per our previous plan and announcement, but made changes to buyback and cancellation of KRW 137.1 billion yet to be implemented and pay out rather a quarterly dividend instead in the same amount. The date of payout at September 30, as previously disclosed. We will further disclose detailed plans through additional updates.
This ends the Q2 presentation, I will now take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question will be presented by Minuh Cha from Goldman Sachs.
Minuh Cha
[Foreign Language] Thank you. I would like to ask you two questions. The first question relates to shopping which is that in the second quarter, we’ve seen a very fast growth in terms of the GMV, compared to that revenue growth seemed to have been a bit slower. And also, we’ve seen a sustained uptrend for your take rate and compared to the once again the advertising rate was a bit slow. Now I would like to understand whether this is attributable to any structural characteristics of your commerce business, or is it because of the overall circumstances or environment that surrounded the ad market? And I understand that you are in the process of rationalizing your take rate fee scheme, what do you think is the upper ceiling that you can go including the advertisement element?
Second question, you’ve also mentioned quite a bit about your point, the Pay Point reward system — scheme and your plans to rationalize that as well. And you’ve made reclassification of your OpEx bringing even the 1% Pay Point to reward point moving — taking that out from the partner expense and putting that under marketing cost. I would like to get some more color as to how you’re going to further drive rationalization of the scheme?
Nam-Sun Kim
[Foreign Language] Responding to your question this is CFO. I would later on hand it over to the CEO for the more of the macro explanation. You’ve mentioned that there’s been a steep growth in our GMV and basically we’ve included the CREAM performance under our Commerce figures and we’ve seen an increase in the take rate from the travel and the booking vertical segment.
We don’t necessarily think that the Commerce advertisement growth rate was lower compared to the GMV. Basically we believe that for the commerce advertisement as well as the core of NAVER, which is the Smart Stores have all displayed a similar level of growth rate. Also in terms of the CREAM, whose billing scheme had not yet been finalized, if you even reflect that to the overall figure, the total GMV is going to display a much higher growth as well.
Regarding the reclassification that 1% pay reward point the reason why we reclassified that and put that under marketing expense is not to mean that we’re going to overhaul the entire pay reward point scheme, it’s just that we feel that the reward points are more appropriate to be part of the marketing expense as opposed to where it was before which was under the partner expense.
Soo-yeon Choi
[Foreign Language] This is the CEO. I will respond to a part of your second question. Relating to shopping with regards to how — what the ceiling could be in terms of our take rate. It is a bit too early to share with you as to when we will reach that point or the extent or the size of that or the level of that take rate.
Now having said that, if you look at the current development, we see that thanks to a more paying merchant related solutions and as we expand into new verticals where the take rates are inherently a little more higher, we believe that from a longer-term perspective blended take rate will start to improve.
Out of the total, second quarter Smart Store GMV, the new vertical services they entail a bit higher level of profitability and their mix is 19.5% and we believe that as we expand into other major services we will see that figure also uptrend. And so in terms of all the other types of paying solutions that will be introduced to our merchant solution centers, we believe that that will also contribute to an uptrend in the take rate.
Nam-Sun Kim
[Foreign Language] In terms of our overall approach to the basic membership fee scheme. Our plan is not to downsize the amount of membership benefit or the overall program. The framework that we have in place, it is just that we are at this point reviewing to make this program more strategic and more efficient. And in light of the fact that we would like to make the membership program make bigger contribution to the GMV trend to the revenue and expanding the loyalty of our user base. Basically, the policies that we will be adopting going forward will give us a much more competitive edge as versus other commerce platforms and will help us better ride over the inflationary economic backdrop.
Operator
[Foreign Language]
The next question will be presented by Dong Hwan Oh from Samsung Securities.
Dong Hwan Oh
[Foreign Language]
Thank you. I would like to ask you two questions. First, it has to do with your cost control or cost management. Your — one of your competitors have said that, they are going to adjust growth rate of the overseas global Webtoon business in order for them to manage their bottom line. Would like to understand what your approach is with regards to your global Webtoon business.
Second question, I understand that you are in the process of looking at different M&A opportunities on the global market, which sector or industry are you mostly interested in?
Soo-yeon Choi
[Foreign Language]
We’re not engaged in a policy or an approach whereby we would — we adjust our growth rate in order to control our cost levels or to control our bottom line. Worldwide, if you look at the trend that’s taking place, also in — particularly in North America, we see that user acquisition cost is up trending, partially because of the changes in the iOS policy. Now that had impacted the Internet companies whereby they are experiencing about 30% to 40% decline in their marketing efficiencies.
So the marketing costs are going — are being pushed up. So, it is — what’s important is not the absolute level of marketing cost itself, but being able to sustain an appropriate level of user acquisition costs, the CAC based on which we would need to acquire subscribers. So our focus is on the efficiency aspect of that marketing spend. We will not be sacrificing our growth in order to just downsize the extent of the losses.
Nam-Sun Kim
[Foreign Language]
When it comes to the M&A plan there is always a limitation as to how much of a detail we could actually share or specify. Having said that, the investments that we are eyeing for will have to be in relation to our core business and also areas that could provide us with an additional engine growth. In the past year or two, most investments were made in term — in the content industry.
We’ve acquired and invested in two companies like eBOOK, Wattpad and some of other domestic players. Going forward, we will also continuously eye the market for any good opportunities mostly in regards to commerce and also our new business growth engine, which is in B2B, but we will not be restricting ourselves to a one specific business or one specific sector.
Soo-yeon Choi
[Foreign Language]
Just to elaborate on our Webtoon business we need to look at the overall picture from a different geography perspective. So we will not be employing a same across-the-board approach when it comes to cost or efficiencies, because if you look at North America and Japan, in the past our marketing activities had to be based off of the applications that we provided.
However, now since we’ve acquired companies like Wattpad and eBOOK, which entail with who has a significant base of users and high level of traffic, there are many ways for us to actually enjoy synergies that we gain out of — through these services. So it will not be just in terms of acquiring the subscribers per se, but also these activities will help us further expand our profitability going forward.
Operator
[Foreign Language] The next question will be presented by Seungjoo Ro from CLSA.
Seungjoo Ro
[Foreign Language] Thank you very much for sharing that more granular level of information, we’ll be able to make better analysis. I have two questions. First is, your display advertisement. The growth rates seemed to have slowed and that had been quite pronounced.
Is it because of the higher sensitivity that this business has as against the overall macro backdrop, or have you reached a limit where you’ve been expanding the services for advertisement and eventually you’re going to reach a point where you’re going to see a dip in the advertisement efficiency. So is that the case?
Second question regarding your Webtoon business, MAU growth has slowed, if you look at markets like Japan, US and Korea and even in US paying user trajectory seems to be quite flat at this point. So would you need to spend more marketing money to buy these users and acquire these additional users, or are you thinking of any additional M&As? What are your plans?
Nam-Sun Kim
[Foreign Language] Regarding the growth of the — the growth rate of the display advertisement and the expansion of the advertisement services, I believe that the current trend that you see is mostly attributable to the base effect. Back in 2021, we adopted the performance ad which really posted a very high and steep growth.
That was the big reason that created the high base and that’s why you’ve seen that slowing down of the growth rate for DA. This does not necessarily mean that the need for further expansion of the advertisement space has been removed or that we have reached a point where we see that efficiency fall.
We believe that, of course, we would have to closely monitor the market as we enter into the Q3 on the overall macroeconomic situation, as well as the endemic impact, but we do not think that this slowing down in growth rate is all that significant or meaningful.
Soo-yeon Choi
[Foreign Language] If you look at the MAU trend the growth trend for Webtoon as well as the paying user the PU matrix there’s bound to be some ups and downs on a quarterly basis. And naturally that trajectory doesn’t just go a single way or one way, because there is an impact from the marketing activities as well, but when also we make selections and focus on a major market for us to focus all of our efforts.
So for markets where we feel that the monetization opportunities are limited we would of course then be placing less focus. So however in terms of the matrix metrics such as the paying users MAU and ARPU we believe that the trend is quite healthy and robust. And for — so aside from the marketing activities what we think is very important is IP development in terms of the contribution that it makes to our bottom-line.
That’s why over the several quarters we’ve put in — we’ve done quite a bit of IP development-related work and the performance and the outcomes are quite favorable. So once we have a good IP that we develop and if we could release content for the screen of Netflix et cetera then that really help with the brand awareness of the Webtoon that we developed.
So that has been an area where we had a strong focus and as we acquired the multiple number of platforms we are at this point endeavoring to bring about good synergies with these other entities. And we believe that once those synergies are created we will be able to trigger further growth.
Operator
[Foreign Language] The next question will be presented by Jae-min Ahn from NH Investment & Securities.
Jae-min Ahn
[Foreign Language] I have a question regarding your outlook for Q3 and second half, relating to your Commerce business. Compared to this year-over-year basis the growth rate in the first half seems to have slowed.
And you look at the competitive landscape where companies like since it get through small club and coupon they’ve been quite aggressive. Also there is on top of that concern for economic slowdown. What is your outlook for Commerce business going forward?
And in terms of the profitability of your content business in Q2, maybe it’s because of the acquisitions that you have undertaken we’ve seen a rise in your revenue. But for each of the business segments the P&L or the size of the loss has also gone up. What would be the trigger point for you to reverse the trend? And when would that timing be?
Soo-yeon Choi
[Foreign Language] Responding to your first question. On the back of pandemic, the growth rate of the e-commerce market as we entered into endemic in the beginning of the year Q1, Q2, the growth have slowed. And we think that in Q3 we will see about the similar trend or it could be a lower growth and in light of that we are making appropriate preparations to respond to that market change.
Having said that Commerce business of NAVER has always outperformed the market and it is supported by the extensive database that we have as well as various multiple platforms that we operate. And we have the broad range in coverage that includes FMCG, household goods, sports and leisure, and we also provide booking services. So, compared to other — our competitors I would have to say that our objective of course is to always bring out performance in terms of growth.
Second question will be explained by our CFO in more detail, but regarding the investment in marketing activities and hiring of talent for our Webtoon business and for SNOW, I guess in a sense you could consider this as an intended loss meaning that for the Webtoon business, we maintain a quite profitable level of margin at 20%. And we believe that once we are able to establish that type of a model across the global market and we believe — although a bit cautious, I believe that we will be able to achieve that from a mid to long-term perspective. And once we reach that OPM level that will provide us with quite a bit of strength.
Nam-Sun Kim
[Foreign Language]
Responding to the question about Commerce. Basically the high growth rate that we’ve witnessed over the past years that was actually out of ordinary. And so we think that the current impact that we are seeing is not necessarily from a significant slowdown in the economic backdrop per se. Because if you look at the total Korean e-commerce market it is currently posting a single-digit growth. That’s the greater market.
So, aside from companies like NAVER and Coupang, there are companies that are currently posting negative growth rate. So, once ,again we do not see that this slowdown in the growth was a direct impact from the peers or from the — against the competitive backdrop as Coupang and NAVER is maintaining the growth rate.
Soo-yeon Choi
[Foreign Language]
And if you look at the size of loss that’s being incurred from our Webtoon business overseas, basically the extent of that loss has been gradually declining as against our revenue. So, this is actually a discretionary type of a deficit meaning that we aren’t — so it’s not something that is above and beyond the marketing spend meaning we can at any time if we wish actually turn off that switch and turn the trend reversely. It’s just the problem of striking that right balance which is always very difficult and which always requires prudence.
And the reason why we decided to share more detailed or granular information on Webtoon is because we felt that the overall market understanding of the business model itself be further improved. I say that because each of the countries have a different way of applying accounting treatment meaning it’s very complicated.
And depending on the type of the contract that’s been executed whether you recognize the revenue on a gross basis or a net basis, the margin rate is going to be different, depending on the types of agreement and in the countries in question.
What’s important is to stock of the trend. The markets like Japan and US, they are very solid markets, and the ARPU levels compared to Korea is higher and there’s also a difference in terms of bargaining power vis-à-vis the creators. So, once we are able to grow the scale of these global markets to a level that is comparable to Korea, we believe that that will have a very positive bottom line impact.
Operator
[Foreign Language] The next question will be presented by Stanley Yang from JPMorgan.
Stanley Yang
[Foreign Language] Thank you also for sharing that more detailed information. I would like to understand the increases in your labor cost based on reclassification of the account, the total as well as stock-based compensation excluded. Second question, if you look at our Japan business, what is the OPM margin for eBOOK? And I understand that there’s a lot of discussion that is ongoing to bring synergies with Z Holdings, talking about Smart Stores, et cetera. So, when would we see that impact come through in your topline revenue? And how big of an impact would that be?
Soo-yeon Choi
[Foreign Language] The rise in labor cost excluding the stock-based compensation factor can be calculated from the adjusted EBITDA figure. You could use that and do calculations to gain at the extent of the rise in labor cost. We cannot make projections, as to how it’s going to move after reflecting stock-based compensation, because no way for us to forecast the equity market. But pre-SBC, if you look at last year figure, there has been a quite significant increase. This year, we’re going to try to reduce the speed of the rise and the labor cost. But once again, hiring takes place across the year, so the impact may not be immediately visible, not even maybe in the Q1 of next year. So I think, about second quarter of next year, we may be able to see that slower rise impact on the figures.
Looking at the margin level for eBOOK up to end of last year, their growth rate you can find that out in the disclosed figures. The OPM was a single digit and e-book basically recognizes the revenue on a gross basis and their take rate is relatively lower, because you have to be mindful of the fact that, they are more of a distributor or taking the books of large publishers and distributing that at scale. So, they are not a type of a platform that would actually generate very aggressively, creative content itself. So they are more focus on distribution of these content. So it would not be all that appropriate to make apples-to-apple comparison with Webtoon.
Regarding the question on synergy with Z Holdings on — there are multiple discussions and collaborations ongoing in terms of commerce, UGC, the local and other segments. And also, there is a discussion regarding the collaboration on the B2B side. Basically — and also just to — I would like to ask for your understanding that because we have a counterparty in this discussion, we won’t be able to disclose all that great level of detail, but come next year we will be able to engage in more concrete talks.
And I think bringing our capabilities in search and search platform — as I mentioned during the search platform segment and also the advertisement and the shopping capabilities that we have by strongly coupling that, we are planning to implant model at Yahoo! JAPAN. And we think the best way to go about that at the very beginning is to take our Smart Store and use that as a very important tool for — in that process.
Regarding the timing and the size, we will do our best to come back to you and communicate to you more details in the nearest possible future. Due to time constraint, we will be taking the final two questions.
Operator
The next question will be presented by Soyun Shin from Crédit Suisse.
Soyun Shin
Can you provide some color on your advertisement business-related guidance? What do you think is going to be the growth rate of your ad revenue for Q3 and second half of the year on Q-on-Q basis under this high level of uncertainties?
Soo-yeon Choi
As you’ve mentioned despite growing uncertainties on the macro backdrop, we won’t be able to be all that definitive. But I believe that in light of the high space effect of year 2021, as well as inflationary pressure and economic uncertainties ’22 would have to wait and see and closely monitor, but our objective is to achieve a double-digit growth.
Operator
The last question will be presented by [indiscernible] Securities.
Unidentified Analyst
I would like to ask two questions. First, on your advertising business. What is the second half outlook is like? And for Q3 what — can you share any color on the advertising trends are looking like? Second question for your long-term growth are there any new business areas that is of interest to the company?
Nam-Sun Kim
Responding to your first question, we think that up to Q2, at least the impact from inflation and economic slowdown has not been all that big on our advertising-related business. And we can see that in these tougher times, advertisers at the end of the day select a company and a platform that have a very strong edge in terms of search ad and we were able to see that across the global big taxes well.
Second half of the year, we cannot be all that definitive in terms of the projections but on a year-over-year basis once again our objective is to achieve double-digit growth rate. Back in 2019, the growth rate was 8.7%. So if you think about that once again the limit – there seems to be a limited impact from macro slowdown but we will very closely respond to the needs of the advertisers and also come up with appropriate countermeasures.
Soo-yeon Choi
[Foreign Language] Regarding next generation business for the future NAVER is equipped with a very strong portfolio of its core business and we are making investments into content and cloud. And these areas we believe could be an important for growth for us in the future as new businesses.
And I think NAVER has a very leadership both in domestic and on the global stage when it comes to community services like NAVER Cafe and BAND are good examples of that. And we expect that there is an online need for people to engage in casual and lighthearted communication.
Next-generation community service is an area that we are also very closely following and looking into and also we already provide multiple vertical theme-based groups where people gather together based on common interest and engage in communication. So this may be an area for us to also tap into through our new services.
When going global, important strategy, B2C is important but B2B we think has greater importance as well. That is why together with Softbank of Japan, we’re currently tapping into opportunities to provide services into the SaaS market. Once we have more concrete plans on our strategy we will come back to you with more information.
Nam-Sun Kim
[Foreign Language] Just to elaborate a little more on the P&L. We wanted to provide a separate basis information because the business mix for NAVER and the revenue mix has been changing along the year, which had a structural impact of rain down on the margin level.
We have not yet separated between search platform and commerce, but if you look at it on a combined basis for the past year there’s been about two percentage point dip in the combined ratio and the combined margin ratio. And that is because of as I mentioned before for Cream we have not yet finalized on the billing model to be applied. And also if you look at advertisement, it’s comprised of SA and DA. And basically depending on the mix of the two, the weighted average margin is going to fall down, meaning, because display advertisement entails higher level of agency fees and also there is a revenue share scheme with the content providers like the media companies with whom we have to share our revenue. So if the DA growth rate is higher than the SA growth rate there is going to be a structural decline in the average weighted margin first search platform.
[Foreign Language] And also looking at our commerce business with the rise in the GMV, the reward point is going to increase and that marketing impact is going to weigh down on margin. But over the past year, I said that there was about two percentage point dip, which means that this market impact has not been that significant. And I’ve mentioned in the previous call that the contribution profit rate there is going to be a difference of about 10 to 15 percentage points between search and commerce. So that really attests the fact that structurally our profitability and bottom line structure for NAVER is quite robust.
And across the board or on an aggregate basis there’s been about four percentage points decline in margin and this is attributable not because of any limitations from a structural perspective or because of any vulnerabilities that our intrinsic businesses have, but it is mostly because of the new business growth, including fintech and content and all the R&D activities that we’ve been engaged.
Soo-yeon Choi
[Foreign Language] This ends NAVER’s earnings presentation for Q2 2022. Thank you everyone for joining us this morning. If you have any further questions please contact us at the IR team. Thank you.
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