Prepared remarks
Thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Webtoon Entertainment Second Quarter 26 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Soohwan Kim, Vice President of Investor Relations. Mr. Kim, please go ahead.
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 and our guidance for the next quarter. Actual results may vary materially from those statements. Information concerning risks, uncertainties, and other factors that could cause results to differ is included 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 we 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 and not as a substitute for GAAP measures.
Joining me today on the call are Yongsoo Kim, President, and David J. Lee, CFO. With that, I will now turn the call over to our founder and CEO, Junkoo Kim. Thank you everyone for joining us today. I will begin by providing a brief overview of the quarter and I will also share more detail on a few strategic investments we announced today. David will then walk us through our financial results in more detail. As always, I encourage you to read our shareholder letter which is available on our Investor Relations website. We delivered another solid quarter with revenue of $339 million and adjusted EBITDA of $5.5 million reflecting continued execution across the business and I am proud of the progress we are making. This quarter, we are introducing a new strategic direction that we believe will power our flywheel into the future. This includes further investment in AI-powered initiatives that strengthen and expand our core on-platform business, which I will share in more detail. We are also scaling our off-platform IP adaptation business to create greater franchise value and bring more fans back to our global platform. We will share more on this in a moment. Turning to AI. This quarter, we took meaningful steps to further integrate AI across our platform with features designed to strengthen our flywheel by expanding audience reach, deepening engagement, and creating new opportunities for creators. Fandoms are built on connection and shared passion and our AI initiatives are designed to further strengthen this sense of community. A great example is our AI-powered auto translation program. By making it easier for stories to reach readers across languages, we can help creators expand their global audience and give users access to more content in their native language. We launched the beta program in May for eligible English-language Canvas creators and the early response from both users and creators has been encouraging. We look forward to expanding the program later this year to a broader group of Canvas creators, and we believe it has the potential to become an important driver of growth. We are also going beyond simple predictive chats with BIAS-ON AI interactive story tech that we introduced this quarter in Korea, where fans hold conversations with characters and build stories of their own. BIAS-ON brings to life characters fans already love, built on official worlds with the approval of the creators who made them. Initiatives like this move webcomics from a one-way reading experience to a deeply engaging and interactive one, and the early results have been positive. We are planning to expand the service to Japan later this year. We also continue to pioneer video innovation in Korea. We recently launched CutCut, a new AI-powered short form animation tool that lets fans create and participate in their favorite story using official IP. In its first week, new Canvas rose 136%, and the number of creators making content grew 188% over the week prior. Video initiatives overall remain an important focus area for us and we are continuing to explore short animation as a way to extend how users experience our IP. Our ambition to be the world's storytelling technology platform is also being supported by exciting collaboration like the one we have with Disney. A quick update on our Disney collaboration: we are excited to introduce an original series later this year, and remain well positioned to launch the new digital comics platform before the end of this year. Before I turn it over to Yongsoo, I want to reiterate my belief in our strategy. We are launching new initiatives to accelerate our growth and receiving great feedback from the fans and creators who make WEBTOON the destination of stories. We continue to expect to return to double-digit growth by the end of the year and look forward to the road ahead. With that, Yongsoo will provide an update on our off-platform initiative. Please go ahead.
Thank you, JK, and thank you to everyone joining us. I am excited to share more details on the next phase of growth for our off-platform IP adaptation business. IP adaptations are a critical element of our flywheel, creating greater franchise value and bringing more fans back to our global platform. With our massive catalog of popular content and database of user engagement, we have a unique opportunity to identify high-potential franchises and participate in their growth. The strong performance of multiple WEBTOON adaptations this quarter, including three series reaching Netflix global top 10, reinforces our confidence in this strategy. To support this evolution, we made two strategic investments during the third quarter. The first is an investment in Allied Games Holdings, which will enable us to turn proven IP into immersive gaming experiences. Games are one of the most engaging forms of fandom, pulling fans deep into a story universe. Unlike many others in this space, we are starting with a strong pipeline from day one. Together, WEBTOON and Allied Games Holdings plan to develop and launch multiple games over the next four years based on proven IP. The formula underpinning our strategy does not stop at games. With Allied Games Holdings, we are building a monetization pipeline that can extend a single IP across multiple formats, creating a repeatable success formula of adaptations that flow from webcomics on our platform to animation and games. In particular, we hope to match game launches with animation releases to maximize their impact. Today, we also announced a dedicated IP adaptation fund. Together with NAVER, we entered into a limited partnership agreement in July to establish a $100 million fund to invest in IP adaptations. This fund will help us capture more value from our massive global hits, evolve beyond licensing to secure strong IP rights, and gain more control over our growing adaptation slate. Our investment reflects our conviction in the long-term value of these projects and aligns our capital with our strongest IP. I am excited about these investments we have made to accelerate our business and we would like to thank our team, our creators, our users, and our partners. With that, I will now turn the call over to David. David, please go ahead.
Thank you, Yongsoo, and thank you everyone for joining us. I will be discussing the details of our second quarter 26 results compared to the comparable quarter in the prior year, unless otherwise noted. For the second quarter, we reported revenue of $339 million that declined 2.8% but grew 5.2% on a constant currency basis. This growth was driven by increases across all three revenue streams: paid content, advertising, and IP adaptations. We expanded gross margin by almost 100 basis points to 26% in the second quarter. We remain focused on expanding profitability further over time and believe our cross-border content distribution as well as growth in higher-margin businesses like advertising will continue to support this. We posted a net loss of $14.6 million in the quarter compared to a net loss of $3.9 million a year prior, driven by higher income tax expense and marketing investment. We reported adjusted EBITDA of $5.5 million, exceeding the high end of guidance. This compares to an adjusted EBITDA of $9.7 million in the same quarter of 2025, as we increased our marketing investments. As a result, our adjusted EPS for the quarter was $0.04 compared to an adjusted EPS of $0.07 in the prior year. Turning to operational health, global MAU increased 0.5% in the quarter. We continue to focus on driving users to our app as well as converting them to paying users. While app MAU and our Webtoon App MAU declined 8.0% and 1.5%, respectively, year over year, we are pleased to have posted MPU growth of 1.8%, driven by growth in Korea, partially offset by decreases in both Japan and Rest of World. We believe we can continue to drive MPU growth by further advancing our AI capabilities and initiatives. Importantly, our English platform Webtoon App MAU increased by 3.7% year over year. Titles that supported this growth included Situationship, an English-language original, as well as Starting Over as a Cheat Player, and The Devil Never Cries. Now, I would like to provide an update on our revenue streams at a consolidated level. Starting with paid content. In the quarter, we posted 4.3% revenue growth on a constant currency basis. As I just mentioned, we are pleased to post another solid quarter of MPU growth, up 1.8% in Q2. We believe we can continue to drive MPU growth as we lean further into our AI capabilities, including the initiatives that JK mentioned earlier. ARPU also increased 2.5% in the quarter on a constant currency basis. Advertising revenue grew 11.5% in the second quarter on a constant currency basis. This was driven primarily by growth in Korea and Rest of World, offset by a decline in Japan. Korea, in particular, has seen an increase in ad revenue from both NAVER and other partners. Finally, our IP adaptation business revenue grew 4.2% year over year on a constant currency basis in Q2. As we have noted previously, revenue recognition for IP Adaptation can vary quarterly based on the achievement of certain milestones. Now I would like to look at our results in the context of core geographies. In Korea, during the second quarter, our revenue grew an impressive 20% year over year on a constant currency basis, driven by double-digit growth in paid content and advertising, offset by a single-digit decline in IP adaptations. During the second quarter, MAU of 24.3 million increased 5.9% year over year, with MPU of 3.8 million representing 10.4% growth year over year. Our paying ratio of 15.5% increased 64 basis points year over year and Korea ARPU was up 14.8% year over year on a constant currency basis. Moving to Japan. For the quarter, Japan revenue declined 6.7% year over year on a constant currency basis. While we saw triple-digit growth in IP adaptations in Japan, it was more than offset by single-digit declines in both paid content and advertising, all on a constant currency basis. Japan's MAU of 21.8 million declined 3.3% year over year but increased on a sequential basis. MPU of 2.1 million remained steady from the first quarter but declined 9.5% year over year, and paying ratio of 9.4% was down 65 basis points year over year. Second quarter Japan ARPU of $24.40 grew 2.9% year over year on a constant currency basis. In Rest of World, we saw revenue growth of 11.1% year over year on a constant currency basis in the quarter, driven by single-digit growth in paid content, and double-digit growth in advertising and IP adaptations. Second quarter Rest of World MAU of 111 million increased 0.2% year over year. While paying ratio of 1.5% was relatively flat year over year, MPU declined 0.6% to 1.7 million. However, we are pleased that Rest of World ARPU of $6.90 increased 4.4% year over year on a reported and constant currency basis. Turning to profitability, gross profit for the quarter grew 1% year over year to $88.1 million. This resulted in a gross margin of 26%, which expanded almost a full percentage point compared to the prior year. Adjusted EBITDA for the quarter was $5.5 million compared to $9.7 million in the prior year quarter, primarily due to increased marketing investment. This resulted in an adjusted EBITDA margin of 1.6% which compares to 2.8% in the prior year. On the cost side, total G&A expenses for the quarter were $65.4 million, roughly in line with the prior year quarter. Interest income in the second quarter was $4.5 million compared to $4.9 million in the prior year, and other income was $2.5 million compared to other loss of $1.4 million in the prior year period. We had an income tax expense of $900 thousand in the quarter, compared to a benefit of $800 thousand in the prior year. Depreciation and amortization was $7.3 million in the second quarter, compared to $8.4 million in the prior year. We posted a net loss of $14.6 million driven by higher income tax expense and marketing investment. This compares to a net loss of $3.9 million in the prior year quarter. As a result, Q2 GAAP loss per share was $0.11 compared to a loss per share of $0.03 in the prior year period. Adjusted EPS was $0.04 in the quarter, compared to an adjusted EPS of $0.07 in the prior year period. Our balance sheet remains strong with a cash balance of $583 million and another $11 million of short-term deposits included in other current assets. We have a capital-efficient business model, and we believe we have the financial strength and flexibility to invest for the long term. Before I wrap up, I would like to spend a few moments discussing our third quarter outlook. For the third quarter of 26, we expect to deliver revenue growth in the range of 0.7% to 3.3% on a constant currency basis. This represents revenue in the range of $358 to $368 million based on current FX rates. We anticipate third quarter adjusted EBITDA in the range of $0 to $5 million representing an adjusted EBITDA margin in the range of 0% to 1.4%. We are excited about the new strategic direction for our company. We believe leaning further into AI initiatives on-platform and investing to scale our off-platform IP adaptations business will continue to strengthen our offering and improve engagement for the long term. We continue to build on Webtoon's position as the destination for storytelling, and we continue to expect we will return to double-digit revenue growth by the end of the year. With that, I would like to turn it back to our operator to begin the Q&A session.
Questions and answers
Thank you. Ladies and gentlemen, this formally begins the question and answer session. At this time, I would like to give you a reminder: if you would like to ask a question, please press star. We would also like to ask everyone to stick to one question and one follow-up so we can take as many questions as possible. Our first question comes from the line of Kunal Madhukar with Deutsche Bank. Please go ahead.
One on engagement and another on the financials. On the engagement side, can you talk about how many minutes per day your users actually use the platform? And can you talk about how many minutes paying users use on the platform? I have a follow-up.
Thank you, Kunal. Great questions. So first, with regard to engagement, what is remarkable about this business is even as you look at Gen Z users in North America or users in our original market here in Korea, you are seeing a very consistent consumer behavior on webcomics and webnovels. We say typically that it averages approximately 30 minutes per day. But the reality is for those who have habituated we know that number can be larger for the heavier users. What is interesting, though, is even for users that are new to this idea of a webcomic, when you think about North American users, they are not traditional paper-based comic fans. They are fans of digital-first entertainment. For them to flick a finger on their mobile device allows instant engagement and yet they still spend that 30-minute average we have seen. With regard to our paid users, we have not released a separate engagement number for our paid users. But we know that the amount of time they spend and the access, because of our micropayment structure to multiple episodes, is the driver of our paid content engine. This is why we tend to report ARPU because, for example, when you see in Korea where we have been for nearly 20 years and we have roughly 50% market penetration, it is remarkable that you are seeing constant-currency revenue growth of 20%, growth in MPU and MAU being a growth driver, and ARPU, which is up 5%. That is why we tend to focus more on ARPU as the measure of deep engagement because we see habit formation in markets that we have been in for some time.
That is a great segue to the question I had on the marketing side. The marketing expense delevered during the quarter, after three quarters of leverage on this line. Where are you spending this money? Is that in Korea? Is that in Japan? And what kind of LTV-to-CAC are you targeting on this marketing spend? Thank you.
Another great question, Kunal. Thank you. So just as we think about marketing, we spent $38 million in the quarter, approximately up 11%. The question is where do we spend and where do we leverage? We have a very diversified portfolio regionally. In Korea, our country of origin where we have the largest market penetration, that is driving 20% growth. There is a relatively efficient steady state of marketing because we already have strong penetration and we have a flow of great content consistently arriving in the market. But when you look at hypergrowth markets, such as Japan and Rest of World where we are still growing adoption, we deliberately choose to invest with a longer LTV horizon, particularly in Rest of World. We are seeing it pay off. While we do not disclose specific LTV-to-CAC ratios, in the past we have noted that growth in English Webtoon MAU has been paired with significant growth in English paid users as well. So we manage a diversified portfolio where we have efficient spend in mature markets like Korea, and intentional forward-looking investment in markets like North America and Japan.
Our next question comes from the line of Mark Mahaney with Evercore. Please go ahead.
I want to ask two questions, please. Could you spend a little bit more time on Japan and what specifically you need to do to return Japan to growth? And should we still count on and lean on an exit of double-digit revenue percent growth in the fourth quarter? Thank you.
Thanks, Mark. First, to cover your second question, we are strongly committed to double-digit growth and believe we will deliver it by the end of Q4. There are two components of that you see evident in the quarter. Korea, our most mature market, grew 20% on a constant-currency basis, and then advertising delivered double-digit growth globally, up 11% on a constant-currency basis. Importantly, within advertising, Rest of World advertising on a constant-currency basis was up north of 20% in the quarter. Now on Japan. There are three key priorities we have been working on since the completion of our infrastructure project at the end of Q1. One is returning Japan's growth through stronger local content, greater engagement, and distribution partnerships. Evidence in the post-quarter period includes partnerships with Studio White and content initiatives such as featuring spin-offs like Record of Lodoss War. Partnerships with Lawson are an example of what is more to come. We elevated a senior product leader to implement the proven track record of growth established in Korea and Japan; that includes CRM and deeper engagement with our customers there. We feel very good about our Q4 commitment and believe Japan is a proven growth market that we are taking the time to stabilize and grow through the course of this year. Thank you.
Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead.
Thanks so much for taking the question. I want to go a little bit deeper in the pivot around IP commercialization. Can you talk about what you saw from your IP adaptation strategy historically that made you want to take a more proactive approach and make the investments you are making today? And going forward over the next two to three years, how should we think about the capital or OpEx intensity of standing up IP commercialization? How much of it will be borne upfront through investment, and how much will you be able to capture in the return profile as properties mature? Thanks so much.
Thank you, Eric. It is a great question. First, I want to distinguish between the generation of new IP on our platform and the commercialization of proven IP off-platform. There is significant innovation on platform, for example in Korea, where I mentioned CutCut helps generate new storylines and grow on-platform engagement. BIAS-ON is yet another AI-powered initiative. Candidly, you are right to note we are making a much more deliberate, aggressive bet on IP that extends beyond our platform with initiatives like Allied Games and the IP adaptation fund. The most important point is we start with a proven pipeline from day one.
Unlike some former examples in the industry, we do not need to worry about what will generate the next hit because we are the source of the hit. In the case of Allied Games, we deliberately partnered with an established game studio. This Allied Games investment allows us, after two closings, to have significant majority control while enabling that organization to run independently. Founded by Kevin Hahn, who has created adaptations like Solo Leveling and Omniscient Reader, Allied brings proven game-development expertise. Our proven IP is now being applied to a proven game maker. Because we think our creators deserve to have formats outside our platform, and as a shareholder, we know there is a whole world of deep engagement in gaming that we can enter with this strategic investment. The IP Adaptation Fund is a way to address capital needs while capturing more upside. By partnering with NAVER on capital, we do not have to consolidate for the vagaries of quarter-to-quarter revenue changes as we bet on commercializing our proven IP. Across every region, you are seeing increases in IP activity and partnerships. We announced collaborations across major partners and content franchises. We expect to be an efficient provider of IP adaptations both on and off platform. Historically, our adaptation business has been licensing-focused, which meant the full economics of hits did not always translate back to WEBTOON. We are expanding our ability to participate more directly in commercialization and economic upside through strategic investments and partnerships. The game pipeline at Allied Games is a strong example that, combined with animation, creates a compelling repeatable flywheel from webcomic to animation to game leveraging proven IP and fandom.
What Yongsoo mentioned is significant. We are not just able to provide games on hit WEBTOON IP; we can also launch animation concurrently to support the games and our own platform IP. We are in a position to do this, which you will begin to see with this partnership and investment.
Great. Really appreciate the color from both of you. Thank you.
Our next question comes from the line of Matthew Cost with Morgan Stanley. Please go ahead.
Great. Thanks for taking the question. Maybe I can just follow up on what was just discussed. If we look at the mobile game industry, in addition to low hit rates and licensed IP not necessarily being a guarantee of success, a lot of companies that are IP holders have exited the business of making games themselves over the years. I am wondering if you could reflect on the synergies and opportunities available by becoming the majority shareholder of Allied and the advantages you see in combining the process of making games with the proven and very successful IP engine on the Webtoon side. Thanks.
You know, I have lived firsthand the question you asked from my former days as CFO of Zynga. I think this is significantly advantaged. Let me explain why. First, we are leveraging a very strong partner; we are not seeking to build game capability from scratch. That would take a long effort. Many companies tried that approach. We recognize our strengths: we have a large content pipeline—thousands of stories—and strong data to identify hits. Second, Allied brings deep expertise geographically and operationally. While the opportunity is global, Allied's proven track record in Korea derisks the investment because many hits originate here and have global appeal. There are clever commercial and financial structures in our partnership that help manage downside risk while aligning incentives. The structure includes provisions that incent both parties to grow together but also manage financial risk, which I can discuss in more detail in a follow-up.
Our next comes from the line of Dae Lee with JPMorgan. Please go ahead.
Great. Thanks for taking the questions. I have two follow-ups as well. First, on the IP adaptation strategy development: if I am understanding this correctly, it sounds like the direct ownership model is for more of the newer IP adaptations like video games and AI-driven products. Is that right, or are you also looking to own content in video or other adaptations as well? Then I have a follow-up.
Thank you, Dae. Let me just make sure I understand the question. You are asking whether we seek a primarily owned model for off-platform IP such as games, and whether the ownership model will apply to video adaptations like live-action video or animation. We benefit from both models. In the case of Allied Games, related to games, this is a majority ownership stake where we have ownership and leverage their independent capability to run the business. We acknowledge their specialized capability. On the other hand, with partners like Disney and other studios, we pursue collaboration models where we provide IP and creators an opportunity to succeed outside our platform but we do not primarily own the distribution or production engine. That is capital efficient but limits upside. We also have internal studio capabilities—StudioN—which has produced Emmy-nominated content and sequels. We are careful and selective when taking on direct ownership for more capital-intensive projects like feature-length films or theatrical releases. We do not want to risk the balance sheet without clear visibility into potential returns, and we have a track record in that selective area with StudioN.
Okay. A follow-up on your double-digit growth expectation for Q4: could you remind us if that was an exit run-rate expectation within the quarter or for the full quarter? And could you talk about the cadence of how you expect to get there given the Q3 guide is in the single-digit range? Thank you.
Good question, Dae. The double-digit growth expectation refers to our exit run rate at the end of Q4, positioning us for persistent growth going into 2027 and beyond. It was not guidance for the full quarter. Regarding the cadence, we start with the strong performance you can see in the current posted quarter results—Korea's 20% constant-currency growth is a major contributor, and total MAU of 156 million, flat year over year, was driven by our most mature market. Advertising growth is another pillar: 11% growth on a constant-currency basis, and Rest of World advertising grew over 20% in constant currency in the quarter. Japan is the area we are stabilizing and growing through the course of the year with local content and partnerships, and that is what we expect to help provide on-platform growth. There will be quarterly variances from IP adaptation timing, but we feel good about the fundamental growth platform exiting this calendar year.
At this time, we have no further questions. That concludes our Q&A session in today's conference call. We would like to thank you for your participation. You may now disconnect.