Kakao., maker of South Korea’s dominant mobile messaging service, said its earnings grew more than tenfold last year, offering a potential business model for social platforms like WhatsApp

April 16, 2014 Leave a comment

Kakao Records Tenfold 2013 Profit Rise Amid IPO Preparations

JONATHAN CHENG and MIN-JEONG LEE

SEOUL—Kakao Corp., maker of South Korea’s dominant mobile messaging service, said its earnings grew more than tenfold last year, offering a potential business model for social platforms like WhatsApp Inc., as investors question whether such companies can turn their swelling user bases into profits.

The announcement comes as Toby Van, the former director of the company’s game-business unit—who helped spearhead Kakao’s initial foray into gaming—will leave the company this week to join a new startup venture, according to people with familiar with the matter.

Kakao said in a filing to Korea’s Financial Supervisory Service that net profit totaled 61.4 billion Korean won ($58 million) in 2013, after recording earnings of 5.3 billion won in 2012—its first-ever annual profit.

The company, based in the Seoul suburb of Pangyo, is gearing up for a potential public listing next year that could value the company at more than $2 billion, according to people familiar with the matter. These people said Kakao is close to signing Morgan StanleyMS +0.13% as an adviser.

The sharp acceleration in Kakao’s earnings comes as the mobile-messaging company racked up sales in 2013 of 210.8 billion won, up from 46.2 billion won a year earlier. It widened its operating profit margin to 31% in 2013, from 15% in 2012.

While Kakao has a stranglehold on its home market, its growth prospects are hampered by strong regional rivals likeTencent Holdings Ltd. TCEHY +5.80% ‘s WeChat service, which is dominant in China, and Japan’s Line, which is operated by Line Corp., a Tokyo-based unit of South Korean Internet firm Naver 035420.SE +3.21% Corporation.

Naver said in a statement Wednesday that its Line service had surpassed 400 million registered users. By contrast, Kakao says its service has 140 million registered users.

Unlike some of its larger rivals that have focused on core services like messaging and voice calls—namely Mountain View, Calif.-based WhatsApp and Cyprus-based Viber, which was purchased earlier this year by Japanese Internet giant Rakuten Inc.—Kakao has aggressively experimented with new revenue models.

It makes money by selling stickers that users can send to their friends and by letting companies and brands send messages and promotions directly to users that choose to receive them.

But most of its profit comes from casual gaming, where Kakao has positioned itself as the dominant mobile platform in Korea. Third-party game developers rely on Kakao to promote their products to users, who compete with their Kakao friends in a variety of racing, color-matching and sports-themed games. Kakao shares revenue with game developers when users spend money on virtual goods.

According to the filing, 84% of Kakao’s revenue came from commissions last year, the vast majority of which is mobile games. In 2012, commissions accounted for about two-thirds of the company’s sales.

While gaming has been a cash cow for the company, Kakao’s increasing reliance on gaming highlights a possible worry for potential investors, particularly in light of Mr. Van’s departure.

A spokeswoman for Kakao declined to comment on Mr. Van’s decision or the company’s listing plans.

Increased investment from competitors could also pressure Kakao. Last month, Shenzhen, China-based Tencent spent $500 million to acquire a 28% stake in CJ Games Corp., the developer of some of the most popular games on Kakao’s platform.

Tencent owns a 13% stake in Kakao and has a seat on the Korean company’s board.

 

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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