Global Big Tech Q3 Earnings Shock... Cloudy Outlook for Neka-o

Naver's Acquisition of Poshmark and Kakao's Outage Compensation Costs Burden

[Asia Economy Reporter Yuri Choi] As global big tech companies such as Alphabet, Google's parent company, and Microsoft (MS) posted lackluster results in the third quarter, the earnings outlook for Naver and Kakao has also darkened. This is due to the expected slowdown in advertising and commerce growth amid the economic downturn. Additionally, Naver is expected to face burdens on future earnings due to the loss recognition of costs related to the acquisition of Poshmark, while Kakao will have to absorb compensation costs from the service outage incident as losses.

Slowdown in Advertising and Commerce Growth Due to Economic Downturn

According to financial information firm FnGuide on the 27th, Naver's estimated operating profit for the third quarter is 312.7 billion KRW, down 10.6% compared to the same period last year. Kakao is expected to increase slightly by 1.6% to 170.9 billion KRW. These figures fall short of market expectations.

During the same period, Naver and Kakao's revenues are expected to grow by 19.8% and 8.5% to 2.0691 trillion KRW and 1.8895 trillion KRW, respectively, but the slowing growth is leading to a decline in profitability.

The main reason for the poor performance is the reduced growth rate in advertising and commerce sectors due to the economic downturn. Naver is generating stable revenue from search advertising, but display advertising, which is more affected by market conditions, is expected to show weak performance. Commerce is also expected to see a lower sales growth rate as the online shopping market remains weak despite the reopening of economic activities.

Kakao is also expected to see a decline in game revenue within the content segment amid sluggish advertising and commerce. This is due to the downward stabilization of revenue from 'Odin' and the drop in revenue ranking of 'Uma Musume: Pretty Derby' following user dissatisfaction incidents.

Naver's 'Poshmark' Acquisition and Kakao's 'Service Outage' Add to Challenges

The market is focusing on future cost burden factors. As the economic downturn is expected to continue for some time, cost control is necessary to improve profit margins.

In Naver's case, the acquisition of Poshmark, the leading secondhand fashion platform in North America, adds to cost burdens. The acquisition fund, amounting to 2.3 trillion KRW, is planned to be covered by cash reserves and asset securitization, but increased personnel and marketing expenses after the merger completion are inevitable. Poshmark recorded sales of 180 million USD (approximately 255.6 billion KRW) in the first half of this year but posted an operating loss due to marketing expenses and others.

Kakao faced an unexpected challenge with the fire at SK C&C's Pangyo data center. Due to service disruptions, sales did not occur over the weekend for Kakao Mobility, Kakao Page, and others, which is expected to result in a 1-2% sales decline in the fourth quarter. Compensation costs due to the service outage are also a burden. The amount estimated to be paid first to paid service users alone is around 40 billion KRW, and if compensation for free users is added, costs will increase further. Even if Kakao later claims damages from SK C&C, a temporary cost reflection is unavoidable.

Researcher Guseongjung from DS Investment & Securities explained, "KakaoTalk has held a dominant position in the messenger platform for over 10 years, so the impact of user churn is limited, and the effect of compensation issues on earnings is short-term. However, the key issue is how platform regulations following this incident will affect growth rates and cost increases."

Meanwhile, Alphabet and MS announced results that fell short of market expectations on the same day. Alphabet's third-quarter revenue was 69.09 billion USD (approximately 99.006 trillion KRW), up 6% year-on-year. This marked the lowest growth rate in nine years, with YouTube advertising revenue declining for the first time. MS's revenue increased by 11% to 50.12 billion USD (approximately 71.17 trillion KRW). The cloud business underperformed expectations, recording the smallest revenue growth in five years. With these companies opening the earnings season with weak results, the outlook for other global big tech firms such as Meta, Apple, and Amazon, which are about to announce their earnings, is also bleak.

This content was produced with the assistance of AI translation services.