Kakao's operating profit drops, but quarterly revenue rises

Kakao reported 113.5 billion won ($87.4 million) in operating profit for the second quarter of 2022, failing to beat the market consensus. The messaging app giant's operating profit was down 33.7 percent in the April-June period from a year earlier..

Kakao's office in Pangyo, Gyeonggi [YONHAP]

Kakao reported 113.5 billion won ($87.4 million) in operating profit for the second quarter of 2022, failing to beat the market consensus.

The messaging app giant's operating profit was down 33.7 percent in the April-June period from a year earlier, according to its preliminary earnings released Thursday. The drop put the figure below the 124.4 billion won market consensus compiled by the FnGuide.

The company cited increased spending on building infrastructure for data centers and investment in artificial intelligence, mainly for its upcoming large-scale AI model, for the drop in profit.

Quarterly revenue rose 12.1 percent to 2.04 trillion won, in line with the market estimate of 2.07 trillion won. Of the total revenue, 48 percent came from the platform, while the remaining 52 percent came from content.

By unit, revenue generated from advertising platform TalkBiz rose 11 percent to 503 billion won, accounting for half of platform business revenue. In the content business, the music unit skyrocketed 130 percent to 480.7 billion won. Its story unit including webtoon, dramas and films, rose 1 percent to 231 billion won.

On year, quarterly revenue from content rose 18 percent to 1.05 trillion won after SM Entertainment became Kakao's consolidated subsidiary in the second quarter of 2023 and its revenue was reflected in Kakao’s earnings.

Net profit for the second quarter plummeted 44.4 percent to 56.3 billion won, missing analysts’ expectations of 104.7 billion won.

Kakao forecasts the investment and infrastructure costs spent on AI will peak in the latter half of 2023. Subsidiary KakaoBrain is working to release Korean Generative Pre-trained Transformer (KoGPT) language model "KoGPT 2.0” by October at the latest.

However, Kakao Chief Investment Officer Bae Jae-hyun said during an online conference call Thursday that the annual operating loss from developing the new AI model will be less than 300 billion won, as the company had initially forecasted in the first quarter through internalization of costs.

“We are internalizing investment costs and trying to efficiently manage them through using Kakao Enterprise’s cloud infrastructure for computations related to AI training,” Bae said.

Kakao CEO Hong Eun-taek emphasized the importance of coming up with a cost-effective AI model.

“There are many AI models, but none which balances out four factors — cost, speed, precision and recency,” Hong said. “Some may think of this as a competition where the company who creates the first large-scale AI model wins, but I believe that it is more important to make a cost-efficient model to apply to our services.”

KoGPT 2.0 will initially be applied to KakaoTalk’s business communication unit.

“For example, in the realms of making reservations, orders and consulting services, the AI model can be used so that it can deal with non-standardized user requests on a personal level.”

The AI model will also be integrated with SM Entertainment’s virtual human project.

“We think it would be possible to apply KakaoBrain’s AI foundation model to virtual humans, and Kakao will be able to invest in that future growth engine field.”

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]