Kakao's second-quarter earnings outlook is bleak. Although it is tightening the belt of its loss-making subsidiaries, it seems that it will take considerable time to improve its performance.
Second-quarter earnings also decline
Financial information firm FnGuide forecasted that Kakao will post sales of 2.0556 trillion KRW and an operating profit of 135.8 billion KRW in the second quarter. Sales are expected to increase by 12.8% year-on-year, but operating profit is projected to decrease by 20.5%. If the forecast holds, this will mark four consecutive quarters of declining performance since the third quarter of last year.
Kakao is desperate to improve its earnings. Last year's operating profit fell to half of the previous year's level. A fire at the Pangyo data center led to increased investment for data redundancy work, which affected the results. This year, subsidiaries that have lost growth momentum are holding the company back.
With the funding drying up due to the economic downturn, Kakao's growth model based on investment attraction and IPOs has reached its limits. Nearly half of the major affiliates recorded losses last year. Significant subsidiaries posted losses including Kakao Enterprise with 140.6 billion KRW, Kakao Entertainment with 13.8 billion KRW, Kakao Style with 51.8 billion KRW, Kakao Pay with 45.5 billion KRW, Kakao Brain with 30.1 billion KRW, and Kakao Healthcare with 8.5 billion KRW.
Kakao has launched management efficiency efforts focusing on loss-making affiliates. Kakao Entertainment has initiated voluntary retirement targeting employees with over 10 years of service, and Kakao Enterprise replaced its CEO and embarked on a high-intensity organizational restructuring.
Even with KakaoTalk revamp and super-large AI unveiling, challenges remain
Kakao announced a major revamp of its flagship service, KakaoTalk, to improve earnings. Starting with the unveiling of the super-large AI image generation model 'Karlo 2.0' on the 10th, it plans to release the Korean language-specialized super-large AI model ‘KoGPT 2.0’ in the third quarter.
Kakao plans to evolve KakaoTalk from a one-on-one chat platform into an interest-based community. To this end, it revamped the third tab of KakaoTalk from the existing 'View' to Open Chat. However, it is uncertain whether this change will directly lead to improved earnings. To generate revenue, TalkBiz (advertising and shopping within KakaoTalk) needs to recover its growth rate from previous years.
Kakao Brain plans to release KoGPT 2.0 in the third quarter and aims to launch the AI conversational chatbot ‘KoChatGPT’ based on it within the year. This also seems unlikely to lead to short-term earnings improvement. In its first-quarter earnings announcement, Kakao anticipated an operating loss of up to 300 billion KRW. It is expected to take considerable time for the super-large AI to translate into earnings even after being integrated with Kakao’s various services.
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