Kakao Increases Investment Despite Profitability Slowdown... R&D Surpasses 1 Trillion Won

Record High R&D and Facility Investment
Investing in Stabilization of Future Technologies and Services such as AI

Kakao significantly increased its investments last year despite a decline in profitability. Both annual research and development (R&D) expenses and facility investments were executed at record-high levels. This was to secure future growth engines such as artificial intelligence (AI) and to prevent repeated service outage incidents.

According to Kakao's 2022 business report submitted to the Financial Supervisory Service on the 27th, last year's R&D expenses amounted to 1.0213 trillion KRW. This was a 33.6% increase compared to 2021, surpassing 1 trillion KRW for the first time. The proportion of R&D expenses to sales grew from 12.5% in 2021 to 14.4% last year.

Facility investments also increased significantly. Last year, Kakao spent 642.8 billion KRW, a 73.4% increase from the previous year. Of this, 452.9 billion KRW was spent on tangible assets including data centers, more than doubling compared to 2021.

Although profitability worsened last year, investments were expanded. Kakao surpassed annual sales of 7 trillion KRW for the first time last year, but operating profit decreased by 2.4% from the previous year to 580.5 billion KRW. This marked a contraction for the first time in four years since 2018. The economy was frozen, and cost burdens such as labor expenses were significant. Accordingly, the company tightened its belt by reducing employee performance bonuses and cutting the director remuneration limit.

Spending over 1 trillion KRW on R&D despite cost reductions was aimed at securing future revenue sources. Kakao is focusing on discovering new growth engines such as AI and healthcare, including the revamp of its core business, KakaoTalk.

The Korean language-specialized large-scale AI model 'KoGPT' is a representative example. To seize new opportunities in the generative AI war that began in earnest with ChatGPT, Kakao plans to launch services utilizing KoGPT within this year. AI services for medical diagnosis, such as chest X-ray interpretation based on KoGPT, will start in Australia, followed by AI personal assistant services within KakaoTalk and advertising copywriting services.

With expanded facility investments, Kakao is also aiming to stabilize its services. After the service outage caused by the SK C&C Pangyo data center fire in October last year, the company promised to increase facility investments. It plans to triple server-related investment amounts over the next five years compared to the past five years. This includes building the Siheung 2nd data center, purchasing infrastructure equipment including servers, strengthening information security, and investing in labor costs.

A Kakao official said, "We are strengthening R&D investments to secure technological competitiveness in various fields such as AI," adding, "R&D in the infrastructure sector involves not only hardware (HW) management and operation such as servers but also future technology research on software (SW)."

On the other hand, Naver reduced its investments relative to sales. Last year, it invested 1.809 trillion KRW in R&D. Although it had expanded annual R&D spending by more than 20% since 2020, last year's increase was limited to 9.3%. The proportion relative to sales also decreased from around 25% to 22.0% last year. Facility investment was 756.2 billion KRW, down 3.1% from the previous year. This was influenced by reduced infrastructure input costs following the completion of the new headquarters '1784' last year.