Executive Summary / Key Takeaways

• WEBTOON Entertainment is a pioneer in digital storytelling, leveraging a unique creator-content-user flywheel and differentiated technology to drive growth in the expanding webcomic and webnovel markets.
• Recent financial performance shows robust constant currency revenue growth (+5.3% in Q1 2025, +13% in FY 2024), particularly strong in Japan and Advertising, despite headwinds from foreign currency fluctuations and specific operational challenges.
• Strategic focus on shifting users to the app, enhancing content discovery through AI (showing promising early results like a 9% increase in episodes read in English platform tests), and cultivating local creator ecosystems is expected to drive future engagement and monetization.
• The company maintains a strong liquidity position with over $550 million in cash and no debt as of March 31, 2025, providing flexibility for strategic investments and growth initiatives, though profitability has been impacted by increased marketing and public company costs.
• Key risks include material weaknesses in internal controls, ongoing securities litigation, impacts from the Wattpad ban in one country and a recent security upgrade, and potential delays in IP adaptation releases, which warrant careful monitoring by investors.

The Genesis of a Storytelling Giant

WEBTOON Entertainment Inc. emerged from a vision to revolutionize how stories are created, consumed, and shared in the digital age. By pioneering the vertical-scroll webcomic format and democratizing content creation, the company built a global platform that empowers a vibrant community of creators and users. This foundational approach established a powerful flywheel where creators are incentivized to produce engaging content, which attracts and retains users, whose engagement in turn fuels monetization opportunities and further encourages creators. This ecosystem, spanning webcomics and webnovels (bolstered by the acquisition of Wattpad), is the bedrock of WEBTOON's business model.

The company's strategic journey has involved significant global expansion, establishing a presence in core markets like Korea and Japan, and extending its reach into North America, Southeast Asia, and Europe. The integration of operations, such as the merger of LINE Digital Frontier and eBook Initiative Japan in late 2024, and strategic investments, like the one in Japanese studio No. 9 in early 2025, underscore a commitment to strengthening its position in key growth geographies and enhancing its content pipeline.

Central to WEBTOON's strategy is its technological differentiation. The company has invested in proprietary AI technology, notably an AI-driven personalized recommendation model. This technology aims to optimize the user experience by personalizing content discovery, moving beyond uniform displays to tailor recommendations for individual users. Rolled out in Korea and completed in June 2024, this model has already shown tangible benefits, contributing to a 2% increase in weekly episodes viewed per user in Korea in the fourth quarter of 2024. Early testing of similar product improvements on the English platform has demonstrated promising results, with a test group showing a 9% increase in the number of episodes read compared to a control group. While the full impact of these global product improvements is anticipated in the back half of 2025, these initiatives highlight the company's focus on leveraging technology to deepen user engagement and improve monetization. The company also utilizes data and tools to enhance creator productivity and combat digital piracy, further embedding technology into its operational fabric.

In the competitive landscape, WEBTOON positions itself as the #1 player in webcomics globally by smartphone monthly active users in its core markets. Its pioneering format and large, engaged user base provide a significant competitive moat. Key direct competitors include Kakao Corp (via Tapas), LY Corp (via Line Manga), and Bilibili Inc. (BILI). While some competitors may exhibit higher profitability margins or cost efficiencies, WEBTOON's strength lies in its innovation speed, particularly in AI-enhanced tools, and its unique community-driven content ecosystem. The company's cross-border strategy, enabling local creators to reach global audiences, differentiates it from more regionally focused players like LY Corp's Line Manga, which nonetheless holds a strong market position in Japan (with LINE Manga topping app revenue charts there multiple times). Indirect competitors include streaming services like Netflix (NFLX) and emerging AI content generation tools, which could offer alternative storytelling formats or potentially impact creator dynamics. However, WEBTOON's microtransaction-based model and the unique nature of its serialized content provide a different value proposition compared to subscription-based or video-centric platforms. The company's strong relationship with its user base, with a significant portion in North America reporting they cannot find similar stories elsewhere, further reinforces its competitive standing.

Performance and Operational Dynamics

WEBTOON's financial performance in the most recent periods reflects both the underlying strength of its business model and the impact of external factors and strategic investments. In the first quarter of 2025, reported revenue was roughly flat year-over-year at $325.7 million, but on a constant currency basis, revenue grew a more robust 5.3%, demonstrating growth across all three revenue streams. This period faced tough comparisons to Q1 2024, which benefited from an extra day and a significant boost in traffic from the "Marry My Husband" IP adaptation release. For the full year 2024, the company reported revenue growth of 5% on a reported basis and a strong 13% on a constant currency basis, reaching $1.35 billion.

Breaking down the revenue streams, Paid Content remains the largest contributor, showing 2.8% constant currency growth in Q1 2025, driven by strength in Japan despite declines in Korea and Rest of World. Advertising has been a notable area of growth, increasing 13.6% on a constant currency basis in Q1 2025 and 19.8% for the full year 2024, fueled by double-digit growth in Korea and Japan. The IP Adaptations business, while smaller, continues to grow, posting 20.7% constant currency growth in Q1 2025 and 6.7% for FY 2024, although it experienced project delays in Korea in late 2024 that impacted that quarter's performance.

Profitability metrics show the impact of strategic investments and public company costs. Adjusted EBITDA for Q1 2025 was $4.1 million, down from $22.2 million in Q1 2024, resulting in a margin of 1.3%. This decline was primarily driven by a significant increase in marketing expense (up 61.9% year-over-year) as the company invests for future growth, and higher general and administrative expenses (up 37.0%) due to stock compensation and costs associated with being a public company. Despite the Q1 dip, FY 2024 saw record Adjusted EBITDA of $67.9 million, representing over 600% growth compared to 2023, indicating improved operational leverage over the longer term. Gross profit margin in Q1 2025 was 22%, down from 25.2% in the prior year, affected by higher stock-based compensation in cost of revenue and a reclassification of marketing expenses, though management believes margins can improve over time by increasing paid content outside Korea.

User metrics present a mixed picture, influenced by strategic shifts and external factors. Global MAU decreased by 10.5% in Q1 2025, primarily due to declines in Korea and Rest of World. In Korea, MAU was impacted by tough comparisons to the "Marry My Husband" IP adaptation boost in Q1 2024 and political turbulence in Q4 2024 that flowed into Q1 2025. In Rest of World, MAU was significantly affected by a government ban on Wattpad in one country and a security upgrade that temporarily impacted search traffic. However, the company is strategically focused on webcomic app MAU, which is seen as a better indicator of long-term paid content potential. This metric showed a 4.2% increase globally in Q1 2025 and 6.7% in Q4 2024, led by growth in English-speaking markets and other key countries. Global MPU increased in Q1 2025, and the paying ratio rose to 4.8% from 4.5%. Global ARPPU also saw healthy growth, up 8.4% on a constant currency basis in Q1 2025, driven by the strategic shift from web to app users.

Financially, WEBTOON maintains a strong balance sheet. As of March 31, 2025, cash and cash equivalents stood at $550.1 million, with no outstanding debt. The company received significant proceeds from its IPO and a subsequent private placement in mid-2024, providing ample liquidity to fund operations, strategic investments in geographic expansion, and general corporate purposes for at least the next 12 months.

Strategic Outlook and Future Growth Drivers

Looking ahead, WEBTOON's strategy centers on leveraging its core strengths to drive profitable constant currency revenue growth. The outlook for the second quarter of 2025 anticipates revenue between $335 million and $345 million, representing 2.2% to 5.2% growth on a constant currency basis. Adjusted EBITDA is guided between $0.5 million and $5.5 million, reflecting continued investments in marketing and infrastructure, as well as additional public company expenses.

Key strategic initiatives expected to fuel future growth include:

• Product Innovation: Significant product improvements, particularly leveraging AI for enhanced content discovery and user experience, are planned for rollout in the back half of 2025. These are expected to drive further engagement and monetization, building on the promising results seen in early tests.
• Global Expansion and Localization: Cultivating local creator ecosystems and content libraries in key growth markets like Japan and Rest of World (including North America and France) remains a priority. This cross-border strategy allows successful local content to reach global audiences, expanding the content moat.
• Advertising Monetization: Advertising is viewed as a significant white-space opportunity. The company is maturing its capabilities, including building a direct sales team in North America, with benefits expected to flow through starting in early 2025. Successful implementation of high-CPM products like pre-roll ads is expected to bolster growth.
• IP Adaptation Leverage: Continuing to adapt successful content into other media formats drives brand awareness and brings new users to the platform, creating a virtuous cycle with the core paid content business.

Management is not providing full-year guidance but remains confident in the long-term strategy. They acknowledge expected FX headwinds in the first half of 2025 compared to the prior year but emphasize the resilience of the business model, particularly its microtransaction structure, which is perceived to offer significant entertainment value at flexible price points, making it potentially less susceptible to macroeconomic downturns.

Risks and Challenges

Despite the positive outlook and strategic momentum, several risks and challenges warrant investor attention.

• Operational and Financial Controls: The identification of material weaknesses in internal control over financial reporting related to accounting resources and period-end processes poses a risk to the accuracy and timeliness of financial reporting. While remediation efforts are underway, their effectiveness and timing are critical to monitor.
• Litigation: The company is facing securities litigation related to its IPO, which could result in significant costs and potential liabilities, although the outcome is uncertain at this early stage.
• User Base Volatility: External factors like the government ban on Wattpad in one country and the impact of the recent security upgrade on search traffic highlight the vulnerability of user metrics to external events and platform changes. While management is addressing these issues, they are expected to continue impacting results in the near term.
• Foreign Currency Fluctuations: Exposure to volatile foreign currencies, particularly the Korean won and Japanese yen, can significantly impact reported revenue and profitability, creating FX headwinds as seen in the guidance for the first half of 2025.
• IP Adaptation Timing: Delays in the release of IP adaptation projects, as experienced in late 2024 and expected in early 2025, can affect quarterly revenue comparisons and the associated organic traffic lift to the platform.

Conclusion

WEBTOON Entertainment stands as a pioneering force in the digital storytelling landscape, built on a robust creator-content-user flywheel and underpinned by strategic technological investments. While recent reported financial results have been impacted by foreign currency headwinds and increased investments in marketing and public company infrastructure, the underlying constant currency growth remains healthy, driven by strong performance in key markets like Japan and expanding revenue streams like advertising. The company's strategic focus on enhancing the user experience through AI-driven discovery, cultivating local content, and leveraging its IP for broader reach positions it well for future growth.

With a strong balance sheet providing ample liquidity, WEBTOON has the financial flexibility to pursue its growth initiatives and navigate the competitive landscape. However, investors should closely monitor the remediation of material weaknesses in internal controls, the outcome of ongoing litigation, and the impact of external factors on user metrics. The successful execution of the product roadmap in the latter half of 2025 and the continued monetization of its growing user base, particularly outside of Korea, will be critical indicators of the company's ability to translate its strategic vision and technological edge into sustained profitable growth in the dynamic global entertainment market.