[Post-IPO]⑬ Plito, Why Did Losses Increase Alongside Improved Performance?

[Asia Economy Reporter Yoo Hyun-seok] Flitto, a language big data specialized company holding the title of the first company to be listed under the special listing for business models, is experiencing increasing deficits after its listing. This appears to be influenced by increased personnel recruitment for growth and rising payment fees due to data acquisition. However, the outlook is bright. Since Flitto has a solid position in the language business, it is expected to benefit as global companies expand their investments in artificial intelligence (AI).

Flitto is a language big data specialized company. It has users in 173 countries, totaling 10.3 million people. Through this, it secures language data in 25 languages including Chinese, Spanish, Japanese, German, and Vietnamese. Its revenue is divided into 'platform sales,' which intermediates translation services among general users through the platform, and 'data sales,' which sells accumulated data through the platform.

The company recorded losses every year from 2016 to 2018. However, Korea Investment & Securities, the lead manager, explained that "operating expenses are fixed selling and administrative expenses (personnel expenses, rent, etc.) that increase to a certain extent as operating revenue grows, so if sales growth is achieved as planned, the company's profitability is expected to improve rapidly." Based on this, it was forecasted that in 2019, operating revenue would be KRW 6.577 billion and operating profit KRW 379 million. It was also expected to achieve high growth annually, with operating revenue of KRW 13.581 billion and operating profit of KRW 3.8 billion in 2020.

Korea Investment & Securities cited data from Tractica, an overseas research specialist, forecasting that the global AI market size will grow more than 20 times from about USD 5 billion in 2017 to over USD 100 billion by 2025. As demand for data to improve AI also surges, Flitto's language data sales are expected to continue growing. Along with this, platform sales are expected to generate stable revenue. Since there is a rapid increase in demand to convert video content such as YouTube into various languages, related benefits are anticipated.

Flitto is also the first company listed under the special listing for business models. This system allows companies that are not currently profitable to apply for listing review if they receive a certain grade or higher from an evaluation agency assessing business feasibility. In Flitto's IPO, the expected price range was KRW 19,000 to KRW 23,000, but the final offering price was set at KRW 26,000, exceeding the upper limit. A total of 1,272 domestic and foreign institutions participated in the demand forecast, recording a competition rate of 1,133 to 1, achieving great success. The subscription competition rate for public shares was also 710.7 to 1.

Although it was successful in the IPO market, its performance did not meet expectations. In 2019, Flitto recorded consolidated sales of KRW 1.985 billion, with a deviation rate of 69.82% compared to the forecast. The company and the lead manager also failed to achieve the expected turnaround to operating profit. The company explained that the transaction amount with major clients in 2019 was postponed to this year and that this was due to accounting recognition of government subsidies as expense deductions. However, the postponed sales amount (KRW 1 billion) was recognized in January.

Sales improved this year, but it seems difficult to escape operating losses. Flitto recorded consolidated operating revenue of KRW 2.2 billion and operating loss of KRW 2.3 billion in the first half. Operating revenue increased by 223.32%, but the deficit widened. This appears to be influenced by increased costs due to personnel recruitment. The number of employees increased from 34 as of March 31, 2019, to about 70 in the first half of this year. The amount paid for salaries in the first half was KRW 1.4 billion, an increase of 128.74% compared to the same period last year. Welfare expenses also increased from KRW 98.69 million to KRW 200 million, and research activity expenses rose from KRW 337.45 million to KRW 445.67 million during the same period.

In particular, payment fees increased by 142.10% to KRW 1.5 billion, which can be seen as a positive factor. This can be interpreted as an increase in users using Flitto. A company official said, "The payment fees have increased significantly because this is the part paid as compensation to users," adding, "Our structure generates revenue as data accumulates, but we have not yet reached the break-even point (BEP)."

The growth potential of the business is promising. The platform business Flitto operates connects those who need translation with those who have translation capabilities. Currently, it services 25 languages. According to IBK Investment & Securities, data on Asian languages accounts for about 67.1% of the total data Flitto provides, showing strength in this language field. Asian languages have different structures from English, making the data highly valuable. IBK Investment & Securities explained in a report last month, "There are currently almost no companies that have systematically secured Asian language data, and Flitto is judged to hold a unique position in this business environment."

Additionally, the data sales business serves as material used to enhance artificial intelligence (AI) functions. Through learning from data supplied by Flitto, AI improves its translation and language abilities, increasing consumer satisfaction. As global IT companies are currently advancing AI sophistication, Flitto is expected to benefit.

Currently, Flitto is mainly strengthening business cooperation with governments and universities. On the 14th, it signed a supply contract worth KRW 200 million with the Korea Electronics and Telecommunications Research Institute to build a Southeast Asian language voice recognition smartphone recording voice database. It is also participating as an AI processing service provider in the '2020 Second Half Data Voucher Support Project' by the Korea Data Industry Promotion Agency, strengthening related businesses. A company official said, "We continue to carry out projects according to government policies," adding, "We plan to continuously build data and proceed with the business."