Kakao Embracing SM, Surpasses 2 Trillion Won in Sales but Shows 'Gloomy Report Card' (Comprehensive)

SM Entertainment Acquisition Drives Quarterly Sales Over 2 Trillion Won
Costs Offset Revenue Growth... Operating Profit Down 34%

Kakao surpassed 2 trillion won in sales in the second quarter of this year, but operating profit declined. Although the acquisition of SM Entertainment (SM) expanded its scale, increased costs offset this growth. This was due to acquisition-related expenses combined with infrastructure investments.

On the 3rd, Kakao announced that its second-quarter sales reached 2.00425 trillion won, a 12% increase compared to the same period last year. This is the first time quarterly sales have exceeded 2 trillion won. On the other hand, operating profit recorded 113.5 billion won, down 34%. Excluding the effect of the SM acquisition, sales were 1.804 trillion won, down 1%, and operating profit was 100.7 billion won, down 41%.

Looking at sales by business segment, the platform segment, including KakaoTalk advertising, saw a slight increase. The content segment surpassed 1 trillion won, boosted by the SM acquisition effect.

The platform segment sales increased 6% year-on-year to 988.7 billion won. TalkBiz sales, which include KakaoTalk advertising, rose 11% to 503 billion won. Meanwhile, portal business sales, including Daum portal advertising, decreased 13% to 89.5 billion won. Other platform sales showed a 6% increase to 396.3 billion won, driven by balanced growth across all Kakao Mobility business sectors and increased overseas payment transaction volume via Kakao Pay.

Content segment sales rose 18% year-on-year to 1.0538 trillion won. Story sales, which include webtoons, increased 1% to 231 billion won due to growth in transactions in Japan and North America. Music sales related to audio content reached 480.7 billion won. With SM's sales reflected, this more than doubled compared to the same period last year. Media sales, including video production and management, declined 38% to 73.5 billion won, and game sales decreased 20% to 268.6 billion won.

Despite record-high sales, operating profit decreased because the increase in costs was greater. Operating expenses rose 17% year-on-year to 1.929 trillion won. The SM acquisition led to increased purchase price allocation (PPA) amortization expenses. PPA amortization expenses are costs paid during mergers and acquisitions (M&A) processes for goodwill, brand value, and so on. Infrastructure investments continued, including artificial intelligence (AI) development and data center redundancy. As a result, the operating profit margin fell 3.8 percentage points from the second quarter of last year to 5.6%.

Infrastructure investment is expected to increase further in the second half of this year. With concentrated AI investments, the company expects total infrastructure-related costs this year to rise about 50% compared to last year. Bae Jae-hyun, Co-CEO of Kakao Community Investment, forecasted, "Costs such as depreciation of graphics processing units (GPU), infrastructure usage fees, and commissions will peak and stabilize from next year."

The company also announced plans to launch a super-large AI model and related vertical services. After October, it plans to unveil a cost-efficient AI model and apply it starting with corporate customer communication areas. This involves KakaoTalk Channel partner companies delivering personalized messages to customers using AI. Hong Eun-taek, CEO of Kakao, explained, "Currently, Talk Channel partners only send one-way messages to customers, but with AI applied, one-on-one interactive communication becomes possible," adding, "It can be integrated with services such as reservations, consultations, and payments."

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