‘Line’ ㅡ two-edged sword for Naver

2014-02-06 17:05

‘Line’ ㅡ two-edged sword for Naver

Firm hires Goldman Sachs, JPMorgan for IPO
By Kim Yoo-chul

Naver, Korea’s dominant web portal, has reported impressive earnings for 2013 thanks to robust performance of its free mobile messaging application ― Line.
But like Samsung Electronics, which is being pressured to cut its heavy dependence on smartphones, Naver is facing a dilemma over its rapidly growing Line business as its dependence on mobile messenger service is growing month after month.
This means that if Line loses growth momentum, it is highly probable that Naver will be significantly impacted due to a lack of an alternate growth engine. 
Naver is now being challenged by the rise of other free messaging applications services, including China’s We Chat and Korea’s Kakao Talk.
The concerns arose after the latest earnings report showed that its growth in 2013 was largely powered by the Line business. The messenger service was launched in Japan in June 2011 and has since reached 231 countries and is offered in 16 languages. 
In a regulatory filing to the Korea Exchange Thursday, Naver said it posted sales of 2.3 trillion won last year, an increase of 28.5 percent from the previous year with Line business generating 454 billion won in revenue, a seven-fold increase year-on-year.
But sales of its display advertisement and other divisions declined by 6.6 percent and 5.2 percent, respectively.
In the fourth quarter, its revenue jumped by 27.7 percent to 640 billion won while its operating profit edged down 2.1 percent to 154.3 billion won. But its net profit fell by 63.4 percent to 46.4 billion won over the cited period. 
Sales of its messenger service Line jumped by 232.2 percent year-on-year, accounting for nearly 20 percent of the combined amount.
“Naver is expected to maintain growth momentum as its Line service is in expanding territories. But the issue is how well the service will perform in the United States and countries in Western Europe,” said Sung Jong-hwa, an analyst at E-Trade Investment in Seoul.
“If it is not performing well in those markets, Naver may be trapped in Line, ironically,” he added.
He added that pressure for capital expenditure for the application service will throw a financial burden on the Korea’s top Internet portal operator from late this year.
“Success of Line business significantly helped us. We will put more resources on Line business to continue our winning streak,” said Naver CEO Kim Sang-hun.
In a conference call to analysts upon the release of its earnings, Naver Chief Financial Officer (CFO) Hwang In-joon said the total number of Line users has exceeded 340 million thanks to steady additions in Latin America, Turkey and Europe.
The CFO remained positive about the external growth of Line. 
But one key condition, according to the executive, is that the firm’s spending on marketing for the service be maintained along last year’s level. 
“This is impossible. Line is growing. But it’s fair to say that the service’s brand awareness isn’t that strong. Naver should spend more and we think that will be a burden. This is the biggest risk factor,” said a senior fund manager from a U.S.-based investment bank in Seoul, who only asked to be identified as Timothy, adding the bank already advised its “top clients” to sell off Naver stocks due to concerns over volatility.
IPO in the United States
In order to support its growth momentum, it plans to push for an initial public offering (IPO) this year to raise more capital.
“Naver plans to attract new Line customers in the United States. Our marketing budget will be flexible according to situations,” said the CFO. But he said that it’s too early to say when and how to proceed with its IPO plan. 
However, a fund manager, who asked not to be named, said chances are still low that Naver will hit the “jackpot” with its IPO plan.
“This is because the Line business is heavily dependent upon Japan. Naver should cut its reliance on Japan,” said the manager. 
According to the company, Japan has 50 million Line users, followed by Thailand with 22 million. Japan accounted for over 80 percent of Line’s annual revenue. Line was originally developed by NHN Corporation in Japan.
According to Naver officials contacted by The Korea Times, it hired major US investment banks including Goldman Sachs, JPMorgan and even Morgan Stanley as “top-line arrangers” for its planned US IPO.
“Line aims to challenge Facebook. This is very ambitious. But if Line fails to impress U.S. customers, then a massive stock selloff will be forthcoming. As the free messaging app market is becoming crowded, it’s no exaggeration to say a looming saturation may drag down its profitability.”