Kakao net income drops 64.5 percent on increased operating expenses

Net profits for the company are down due to investment in new ventures, the search for new growth engines, and the termination of deals with a number of ad network partners.
Written by Philip Iglauer, Contributor

Kakao, the operator of South Korea's popular chat app KakaoTalk, posted a 64.5 percent loss in net income for the first quarter of this year due to a higher operating expenses from launching new O2O businesses.

Kakao reported a net profit of 10.94 billion won ($9.35 million) for the January-March period, down significantly from 30.84 billion won ($26.47 million) that the company reported for the first quarter of 2015.

Profits were down as a result of investments in new revenue generators that the company expects to come online later this year, Kakao said.

The company spent 221.4 billion won in operating expenses in the first quarter, up 14.1 percent from a year earlier, reflecting a greater spend in the search for new growth engines. The company plans to launch two additional businesses this year to its expansive menu of O2O ventures that could pay off in this regard: Kakao Hair Shop, a hair salon reservation service, and Kakao Driver, an on-demand designated driver service.

Although overall revenue inched up 3.5 percent year-over-year to 242.4 billion won ($208 million) from 234.39 billion won in the first quarter of 2015, Kakao's operating income dropped 47.7 percent drop to 21.09 billion. It was 40.35 billion won in the first quarter of 2015.

"The decline [in revenues] reflects the off season factor plus the termination of deals with a number of ad network partners as part of Kakao's continued efforts to optimize ad traffic and revamp the overall ad platform," Kakao said in a statement released with its filing. Kakao said its advertisement business posted sales of 129.4 billion won, down 11.1 percent from a year earlier.

Kakao gets 53 percent of its revenue from ads, and about a quarter from games. The company said it raked in 70.3 billion won in revenue from games in the first quarter, nearly unchanged from the first quarter of the previous year, but a 23.3 percent increase from the fourth quarter of 2015 because of a strong show from its For Kakao games and the popularity of its Black Desert Online in Europe and North America.

Kakao's CFO Choi Sae-hoon and Choi Yong-suk, head of IR and finance, said in a conference call after the financial report that the company expects strong performance from games in the second quarter in part from Black Desert Online's continued popularity.

It is also planning to launch an in-game ad model called Kakao Game AD+ in July, saying that "this addition will contribute to profit model diversification for game developers, allowing for an ad-based revenue model to the paid model and the currently dominant freemium model".

KakaoTalk has about 39 million MAUs in South Korea, with Kakao drawing 63 percent of the revenue coming from its mobile businesses.

Kakao added a web-based bank service at the end of last year to its list of business ventures, and in February launched a new mobile build to order (BTO) platform aimed at minimising inventory and combating waste from mass production.

Source: ZDNet.co.kr

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