Inside Webtoon's S-1 filing
A little weekend fund for us both
Welcome back to Cautious Optimism. Today is June 9th, 2024. Today we’re digging into the Webtoon IPO filing and taking a quick peek at what Tempus AI’s IPO price range can tell us.
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Webtoon
Just over a week ago, Webtoon — stylized ‘WEBTOON’ — dropped its S-1 filing. You can read along here if you want. I’ll call out the odd page number when pertinent. Let’s talk about what the company is, how it makes money, and how strong a business it is today.
What is Webtoon? An online platform for amateur and professional artists to upload, share, and monetize comics and written fiction. (It bought fiction Wattpad from its parent company in 2023.)
Who uses it? ~169 million users (March 31, 2024 data) across 150 countries. Webtoon’s listed core countries are “Korea, Japan and the U.S. and Canada;” it has the most engagement with Gen Z and millennials.
Here’s what Webtoon has managed in recent years to grow its creator base, for reference:
Who owns it? Naver, a South Korean Internet giant in both search and ecommerce, and LY, a public Japanese digital holding company controlled by A Holdings. A Holdings is owned by SoftBank and Naver. In short, Naver and Softbank.
How does it make money? Advertising, IP deals, and charging users for access to content on its platform. Webtoon generates far more revenue from paid content (80.2% of revenue in 2023) than it does from advertising (11.3%), or IP (8.4%).
Here’s how the company’s revenue broke down by source in recent years:
Is it a good business? Yes, but it’s not a growth monster.
Webtoon posted acceptable growth from 2022 to 2023, with its revenue rising 18.8% from $1.08 billion to $1.28 billion. Growth thus far in 2024 has been more modest, with Q1 2024 revenues expanding just 5% from $310.3 million in the first quarter of last year to the $326.7 million in the first three months of this year.
Despite posting a de minimis rise in total operating costs from 2022 to 2023 (offset in profit terms by soaring revenue costs, which expanded 22.4%), Webtoon has demonstrated spend discipline to start 2024. In the first quarter of this year, despite greater revenues, the company’s marketing and G&A costs fell 33.4% and 13.6% year-over-year, helping it swing from an operating loss of $19.8 million to an operating profit of $14.2 million to kick off the year.
By the time you reach the bottom line, Webtoon posted net income of $6.2 million in Q1 2024, dramatically superior to the -$18.3 million it saw in Q1 2023.
What you have to understand about Webtoon, however, is that it has extreme revenue costs — expenses to generate its top line that vastly outstrip what we tend to see from pure-play software companies.
How does Webtoon define its costs of revenue? “Paid Content creator revenue shared with creators, app store fees and other variable costs,” per its S-1 filing. Sure, app store fees matter, but Webtoon’s 25% Q1 2024 gross margins are predicated on its creator payouts, as we can see here:
The component of our cost of revenue related to creator revenue share (which we share from our revenue streams across Paid Content, advertising, and IP Adaptations) and third-party payment fees (from web and mobile app including fees to payment gateway companies for processing payments as well as platform fees payable to Google and Apple) was $862.2 million for the year ended December 31, 2023, representing 67% of our total revenue.
Slow growth, modest profits, and a business model that sends three out of every four dollars it receives out the door before paying its own operating cost? Seems a bit more Spotify (trailing P/S=4) than Crowdstrike (trailing P/S=26), yeah?
Well, there’s something fascinating at the core of Webtoon’s business that makes it, at minimum, a wager that public-market investors might want to back. The argument is not hard to spot (emphasis added):
As of the quarter ended March 31, 2024, our global MAU have stabilized to reach approximately 170 million. By geographic regions, Korea, Japan, and Rest of World contributed 15%, 12%, and 73% of global MAU, respectively […] As of the quarter ended March 31, 2024, our global [Monthly Paying Users, or MPUs] reached 7.8 million with a paying ratio of 4.6%. By geographic regions, Korea, Japan, and Rest of World contributed 49%, 28% and 23% of global MPU, respectively
Webtoon has greatly scaled its global audience, but monetization lags in certain markets. If it can drive more paid activity in non-Asian markets, Webtoon growth could rebound. A lot. For a long time.
But, if it fails to make its Rest of World users more like its Korean and Japanese users it could remain stuck in first gear.
Even if you are bullish on Webtoon eventually getting more folks to pay for the material its creators publish, there are a few troubles in the company’s S-1 filing for us to chew on:
Global MAU growth has stopped:
Rest of World MAUs are trending flat to down:
Global Monthly Paying Users (MPUs) are down from mid-2022:
Rest of World MPUs are down:
And to cap it all off, Webtoon “identified certain material weaknesses in our internal control over financial reporting” that it details on page 68 that are not non-troubling.
Summary: Webtoon is a neat company that a lot of artists and writers depend on to make their living. It’s also profitable and growing. However, slow top-line expansion and limited near-term upside in its user base make it a somewhat staid enterprise compared to the venture-backed IPOs we tend to watch.
Tempus AI’s IPO pricing
How much sense does upcoming IPO Tempus AI make at $35 to $37 per share with a fully diluted midpoint valuation of $6.2 billion?
With $145.8 million in Q1 2024 revenue (up 26% year-over-year), but rising net losses ($64.7 million Q1 2024, $54.2 million Q1 2023), Tempus is pretty darn unprofitable for its heft. And yet, with a run rate of under $600 million, the company is looking at a potential valuation of over $6 billion, giving it a run-rate multiple of just over 10x.
That’s healthy for today’s market. So, what can we learn from Tempus? That if your big pitch is about AI you can still get a double-digit revenue multiple so long as you are growing. When Tempus formally prices, we’ll have more.
Chat tomorrow! — Alex