Naver Earnings: Reduced Content Losses Drive Record Operating Profit

Naver 035420 reported second-quarter 2023 revenue growth of 17.7% with operating profit up 10.8% year on year to a quarterly record KRW 375 billion, ahead of our expectations. The key search platform business, which underpins Naver’s narrow moat based on intangible assets and network effect, reported revenue growth of only 0.5% year on year in the second quarter, in line with the slowdown since fourth-quarter 2022, but we believe this is related to an industrywide advertising slowdown and does not reflect any significant deterioration in the competitive position of this business. The growth in operating profit was driven by a KRW 34 billion reduction in losses from the content business and a KRW 38 billion increase in profit contribution from the search and e-commerce businesses. We retained our 2023 revenue forecasts, which call for 18.5% revenue growth, but increased our 2023 operating profit forecasts by 18% with a smaller increase in outer years mainly due to the reduction in the content division’s losses. We increase our fair value estimate for Naver to KRW 270,000 per share, from KRW 240,000 previously, and we see it as fairly valued at these levels.

The headline result was again hit by a couple of accounting changes and consolidation of an acquisition. The company increased its average depreciation life span to five years from four years previously, which added around KRW 23 billion or 7% to operating profit. It also moved from a net to gross basis for accounting in the content business, which adds to revenue and costs, but has no impact on operating profit. The Poshmark acquisition was completed as of Jan. 5 . Excluding the Poshmark consolidation, second-quarter revenue would have been up 11.7% year on year. Poshmark was also EBITDA-positive and although its exact operating profit contribution was not disclosed we expect it would have had a mild positive impact on operating profit.