Kakao’s Q1 profit halves due to aggressive investment

IT giant to exit unprofitable business, form independent in-house company of Daum portal

Kakao's Pangyo headquarters in Gyeonggi Province (Yonhap)

Kakao, the operator of South Korea’s No. 1 messenger app, KakaoTalk, said Thursday that its first-quarter operating profit had tumbled by more than half due to increased investment in infrastructure and promising businesses.

The IT giant’s operating income came to 71.1 billion won ($53.6 million) in the January-March period, dipping 55.2 percent from 158.7 billion won marked a year ago. Net profit nosedived 93.4 percent on-year to 87.1 billion won, according to Kakao in a regulatory filing.

Meanwhile, sales went up by 5.4 percent on-year to 1.74 trillion won over the three months.

The first-quarter earnings fell short of market expectations, while local analyst consensus values of Kakao’s operating profit and net income provided to market intelligence FnGuide were 122.7 billion won and 1.83 trillion won, respectively.

Kakao attributed the worse-than-expected performance to its increased investment in new businesses and infrastructure, mainly in artificial intelligence and data center facilities.

“Operating profit declined due to higher-than-expected investments in data center multiplexing, AI, cloud technology and health care to provide stable and continuous services,” Kakao CEO Hong Eun-taek said in the first-quarter earnings call.

The company said it will continue to make aggressive investments in AI-related business this year. The amount of such investments will likely be very high, which could cause as much as 300 billion won in operating losses, but it will scale down the amount significantly starting next year, according to Kakao Chief Investment Officer Bae Jae-hyun.

Kakao and its affiliates are making efforts to streamline costs further. The tech giant is planning to exit some businesses that it believes are not competitive enough, the CIO said, hoping that this process improves the firm’s profits and losses.

Unlike in its platform and content business, the company’s portal business saw a downturn in the first quarter with revenue of 83.6 billion won, falling 26.7 percent from a year ago.

After Thursday‘s earnings call, Kakao announced that it had decided to separate its online portal from search engine Daum, forming it into an independent in-house company it called a “company-in-company.” The news came nine years after Kakao’s merger with Daum in 2014. The company will be established on May 15, according to Kakao.

“We are considering reorganizing Daum’s business organization into an independent in-house company to strengthen portal service competitiveness,“ a Kakao official told The Korea Herald. ”But we do not have any plan to split-off or sell-off the business.”

Daum’s share of the local search engine market stands at nearly 5 percent. The company is planning to develop portal services under an independent decision-making structure, as the importance of preempting the AI market with the emergence of ChatGPT is advancing rapidly.

During Thursday’s earnings call, Kakao also announced that it will unveil the upgraded version of its Korean-language AI model, KoGPT, in the second half of this year.

The release date is slightly later than its original schedule in the first half of this year.

“Kakao Brain (Kakao’s AI subsidiary) is refining its model by securing real-use data while testing AI chatbot services based on messages during the first half of this year, and aims to unveil KoGPT 2.0 with expanded parameters and data tokens in the second half of this year,” the CEO said.

He also hinted at Kakao‘s possible collaboration with other global big-tech firms such as ChatGPT developer Open AI by mentioning that “the door of possibility is definitely open.”

Regarding the competitiveness of its advanced AI model, Hong said: “Although the parameters or data may be insufficient, there will be nothing lacking about it as a Korean-language model.”

While Kakao‘s earnings report came before the opening of Thursday’s market, shares of the IT giant closed at 57,200 won, down 1.89 percent from the previous session’s close.

By Jie Ye-eun(yeeun@heraldcorp.com)