Kakao Faces Earnings Cloud... Hong Eun-taek Apologizes for Concerns Over SM Allegations (Comprehensive)

Record Highest Q3 Sales but Operating Profit Down 7%
5 Consecutive Quarters of Performance Slowdown... Overlapping Judicial Risks
Hong Euntaek "Deeply Aware of Social Responsibility, Minimizing Business Risks"

Kakao, facing a crisis due to judicial risks involving its management, has also encountered dark clouds over its earnings. Its operating profit for the third quarter of this year declined compared to the same period last year, marking five consecutive quarters of performance slowdown. Hong Eun-taek, CEO of Kakao, apologized for the market manipulation allegations related to the acquisition of SM Entertainment (SM) and stated that minimizing business risks will be pursued as the top priority.

On the 9th, Kakao announced that its sales for the third quarter of this year reached 2.1609 trillion KRW, with an operating profit of 140.3 billion KRW. Sales increased by 16% compared to the same period last year, but operating profit decreased by 7%. The operating profit margin stood at 6.5%.

Thanks to the acquisition of SM, sales exceeded 2 trillion KRW for two consecutive quarters, including the previous quarter, but profitability declined. This was due to increased investments in new businesses such as artificial intelligence (AI) and higher labor costs. Excluding SM, sales amounted to 1.9045 trillion KRW, up 2% year-on-year, while operating profit was 115.1 billion KRW, down 23%.

[Image source=Yonhap News]

The earnings conference call on the day was attended by CEO Hong and Lee Ji-yoon, Kakao’s IR director. Bae Jae-hyun, Kakao’s Chief Investment Officer, who used to attend every quarter, is currently detained due to the SM market manipulation allegations. CEO Hong opened by saying, "We apologize for causing concern due to the negative issues arising during the SM acquisition process," and added, "We are faithfully explaining the related allegations to judicial authorities." He continued, "Starting as a small startup, we have grown into the most widely used service by the public," and said, "We deeply feel the social responsibility that has grown with the company and will reorganize the organization accordingly."

Looking at the performance by division, platform division sales in the third quarter increased by 4% year-on-year to 1.0295 trillion KRW. Talk Biz sales rose 11% to 517.7 billion KRW. Among Talk Biz sales, advertising revenues such as Biz Board and KakaoTalk Channel grew by 8%. Transactional sales, including Gift and Talk Store, also increased by 15%. While business messaging continued its growth trend, high-end brand transaction volume increased in Gift. On the other hand, portal Biz sales, which include advertising revenue from the portal Daum, fell 24% to 83.2 billion KRW due to a decline in Daum’s search market share. Other platform sales recorded 428.5 billion KRW. Kakao Pay’s global transaction volume increased, and all business sectors of Kakao Mobility grew steadily, resulting in a 5% increase.

Kakao Q3 Consolidated Results
[Image provided by Kakao]

Content division sales rose 30% year-on-year to 1.1315 trillion KRW. Story sales increased 8% to 249.1 billion KRW. Kakao Piccoma, which provides webtoons, set a quarterly record for transaction volume in Japan. Kakao Entertainment’s sales grew 8%, supported by increased views of domestic original webtoon intellectual property (IP) such as Moving. Music sales surged 105% to 513.3 billion KRW, thanks to increased activities by SM artists and record-breaking quarterly album sales. Excluding the effect of the SM acquisition, music sales increased 3% year-on-year. Media sales also rose 14% to 107 billion KRW. Conversely, game sales declined 12% to 262 billion KRW. Despite new releases, the non-game sector was hit by the economic downturn.

Kakao plans to continue its management policy focused on strengthening its business structure and concentrating on fundamentals to sustain growth. The company explained that it will continue investing to provide users with convenient and safe services stably.

In the AI, healthcare, and cloud sectors, which are identified as future growth engines, business will proceed without disruption. Kakao Brain has completed building some of the foundation AI models of various sizes. With the goal of connecting people and AI, it plans to launch an AI content bot integrated into open chat. Moving beyond a professional baseball broadcast chatbot, the AI chatbot will curate customized content according to the user’s favorite team. Kakao Healthcare is preparing for business approval of its blood sugar management service within the year and plans to expand hospitals adopting its medical appointment service. Kakao Enterprise, which operates the cloud business, aims to complete business efficiency improvements by the first quarter of next year and provide cloud infrastructure to AI service operators.

Meanwhile, over the past two years, Kakao has completed dividends totaling 49.2 billion KRW and share buybacks amounting to 422.4 billion KRW, equivalent to 1.4% of issued shares. In 2024, the company plans to announce an enhanced mid- to long-term shareholder return policy.