Kakao bets on AI bot for breakthrough

Kakao Corp., the operator of South Korea’s dominant chat app KakaoTalk, will seek a breakthrough with an artificial intelligence-powered bot after reporting a drop in operating profit in the third quarter for the fifth straight quarter amid growing regulatory risk.

The company announced in a regulatory filing on Thursday that it raked in 140.3 billion won ($106.9 million) in operating profit on a consolidated basis for the July-September period of this year, down 6.7% from the same period last year but up 23.6% from the previous quarter.

This was the fifth on-year drop in operating profit, but the result beat FnGuide Inc.'s market consensus of 127.4 billion won.

Its net profit plunged 63.9% on-year to 49.5 billion won in the quarter despite its highest-ever quarterly revenue of 2.2 trillion won, up 16.3% from a year ago.

The record revenue was largely driven by the upbeat business of SM Entertainment Co., which was acquired by the Korean internet giant earlier this year.

Kakao’s revenue excluding SM Entertainment inched up 2% on-year to 1.9 trillion won in the quarter.

Kakao shares ended up 3.8% at 45,600 won on Thursday.

The company said during an earnings conference call on the same day that it will introduce an AI bot in KakaoTalk’s Open Chat, a service where users can share their stories and feelings via an Invite link, as soon as possible.   

OPEN-CHAT AI BOT

The new AI bot will offer a variety of content tailored to the different interests of Open Chat users so the users can create various communities.

Kakao will later enhance the AI bot with advertising and shopping functions to generate revenue at home and abroad, the company said. 

“We will increase customized content for different communities by 100,000 to 500,000 users,” said Kakao’s Chief Executive Officer Hong Eun-taek during the conference call. “We will demonstrate 10 bots customized for different sectors to verify their scalability and validate them via a proof of concept process within this year.”

Hong was also confident that the company would be able to reduce generative AI-related costs with an open-source-backed AI foundation model.

Kakao also plans to roll out a blood sugar monitoring device under development by KakaoHealthcare Corp. early next year.

SINCERE APOLOGY FOR ALLEGED MISMANAGEMENT

Kakao’s CEO also apologized for the company’s alleged mismanagement under scrutiny.

Kakao currently faces growing regulatory heat after one of its executives last month was arrested for suspected stock market manipulation during its acquisition of SM Entertainment in violation of Korea’s Capital Markets Act.

South Korean President Yoon Suk Yeol last week labeled Kakao Mobility’s taxi-hailing service monopolistic and condemned its unfair business practices as “very immoral,” and requiring a review.

Amid the growing legal risk, Kakao has announced a plan to establish a Compliance and Trust Committee, an independent body to monitor compliance and management ethics of the companies under Kakao.

Kakao founder and Chairman Kim Beom-soo also convened an emergency meeting with the chief executives of its subsidiaries on Monday, the second of its kind in a week.

The information technology giant, controlling multiple companies ranging from a chat app to digital banking, taxi services and entertainment, is undergoing the most difficult time in its 13-year history.

Hong on Thursday reaffirmed the company’s plan to reform the company and vowed to minimize business risk for the sake of shareholders and carry out new businesses without delay.

REVENUE BY DIVISION

Its Content division managing game, music, story and media businesses raked in 1.1 trillion won in the third quarter, up 30% from the same period the prior year.

Music revenue more than doubled from a year ago to 513 billion won, of which 266.3 billion won, or 24% of Kakao’s entire revenue, was from SM Entertainment largely thanks to record-high album sales by the entertainment agency’s artists.

Before Korea’s iconic music agency formally joined the Korean internet giant, Kakao earned about 200 billion won in music sales in recent quarters until the first quarter of this year.

Kakao beat HYBE Co., the company behind the global K-pop sensation BTS, in a battle for SM Entertainment in late March.

Media and Story revenue increased 14% and 8% on-year, respectively, in the third quarter but Game sales dropped 12% to 260 billion won.

Sales of Kakao’s other pillar Platform business, controlling Talk Biz, Portal Biz and other platforms, increased 4.3% on-year to 1 trillion won thanks to the solid performance of Talk Biz and other platform businesses, the company said.

But Portal Biz saw a 24% on-year fall to 83.2 billion won due to a decline in users of internet portal service Daum.

Write to Ju-Hyun Lee at deep@hankyung.com

Sookyung Seo edited this article.