Kakao Q3 profit drops 63.9 percent

Kakao's third-quarter net profit fell 63.9 percent on year. The company attributed the decline to the additional costs of investments in infrastructure and restructuring of subsidiaries.

Kakao announced its third-quarter earnings in a regulatory filing on Thursday. [KAKAO]

Kakao's third-quarter net profit fell 63.9 percent on year, largely due to higher operating costs, the company said Thursday.

Net profit for the July-September period stood at 49.5 billion won ($37.8 million) on a consolidated basis compared to 137.2 billion won from a year ago, according to Kakao's regulatory filing.

Operating profit fell 6.7 percent on year to 140.3 billion won, while sales increased 16.3 percent to 2.16 trillion won.

The earnings fell behind market expectations. The average analyst estimate for net profit had been 108.8 billion won, according to a survey by financial data firm Yonhap Infomax.

The company said its net profit dropped, despite strong sales, because of a sharp increase in operating costs from its investment in infrastructure, including a data center, and restructuring of its subsidiaries, including Kakao Entertainment and Kakao Enterprise.

Sales from Kakao's flagship platform business grew 4 percent on year to 1.03 trillion won in the third quarter. The platform has added 700,000 more monthly active users since last year.

Revenue from mobile messenger KakaoTalk rose 11 percent on year to 517.7 billion won, largely due to the application's commerce functions, while revenue from the internet portal business fell 24 percent to 83.2 billion won.

Revenue from other platforms, including Kakao Pay and Kakao Mobility, rose 5 percent on year to 428.5 billion won.

Kakao's content unit saw its sales jump 30 percent on year to 1.1 trillion won with growth from its webtoon and media businesses, as well as strong earnings from its K-pop powerhouse, SM Entertainment, which the company acquired earlier this year.

Revenue from Kakao's music business soared 105 percent on year as SM artists posted record high quarterly album sales in the July-September period.

Excluding SM Entertainment sales, Kakao's music business only added 3 percent to on-year revenue.

In the earnings call, Kakao CEO Hong Eun-taek offered an apology to shareholders for the accusations the company has faced of stock manipulation in connection to its acquisition of SM Entertainment. Hong said that Kakao is faithfully vindicating itself by cooperating with investigative authorities.

Kakao has been accused of inflating SM Entertainment's stock price by pouring some 240 billion won into winning a bidding war against management agency Hybe in February.

Last month, the Financial Supervisory Service (FSS) referred Kakao, Kakao Entertainment and three of the company's senior executives, including Chief Investment Officer Bae Jae-hyun, to prosecutors on suspicions that Kakao had inflated the stock prices.

Kakao founder Kim Beom-su is also suspected of involvement in the case, but the FSS has yet to refer him to the prosecution.

“We feel the bigger social responsibility that came along with the growth of the company and will push for a reorganization after giving deep thought into our management system,” Hong said.

Hong stressed that the company will first focus on minimizing risks for its shareholders, and that it will push ahead with new businesses as planned.

As part of Kakao's AI business plan, Hong said the company will launch a content bot — a micro-vertical AI service that curates customized content for its users — on its open chat platform in the near future.

Hong's remarks came amid speculation the planned release of Kakao's hyperscale AI model KoGPT 2.0 by the end of this year may be postponed due to ongoing management risks.

BY KIM JU-YEON, YONHAP [kim.juyeon2@joongang.co.kr]