Operating losses cloud Kakao Entertainment’s IPO plan

finance
06/05/2023 16:49

Operating losses cloud Kakao Entertainment’s IPO plan

Kakao Entertainment Headquarters in Seoul / Yonhap

Webtoon and web novel platform loss behind poor profitability

By Anna J Park

Despite being led by a superstar like IU, Kakao Entertainment suffered an operating loss last year for the first time in seven years, eclipsing its ambitious IPO plan. The unusually poor profitability of a major entertainment and content company hurts all the more as its rivals, including HYBE and JYP Entertainment, have recently seen their share prices soar on record-breaking profits.

The cocoa conglomerate’s entertainment subsidiary posted an annual operating loss of 13.8 billion won ($10.5 million) and revenue of 1.8 trillion won last year. While annual sales rose about 50 percent from 2021’s 1.2 trillion won, 2021 operating profit turned into a loss from 29.6 billion won the following year.

Market observers cite poor earnings from the company’s webtoon and web novel businesses as the main reason for the deteriorating profitability. Kakao Entertainment formed Tapas Entertainment last September through the merger of Tapas Media with Radish Media, both acquired in 2021. The US-based web toon and web novel platform company posted a net loss of 228.2 billion won last year.

Image by Tapas Entertainment / Courtesy of Tapas Entertainment

Alongside the U.S. subsidiary’s unprofitable performance, Kakao Entertainment’s other three content production subsidiaries — including Kross Pictures, Next Level Studio and 3Y Corporation — posted annual losses of 3.3 billion won, 2.2 billion won and 1.5 billion, respectively billion won.

As a result, Kakao Entertainment’s valuation has remained low in recent years. The company originally wanted to be valued at 20 trillion won when it goes public later this year. But its value is still around 11-12 trillion won, barely above the estimate of 10 trillion won it received in October 2021.

Given that HYBE’s market cap stood at 11.05 trillion won as of Monday, it is questionable whether Kakao Entertainment can even maintain its 11 trillion won valuation. Contrasting with Kakao Entertainment’s poor earnings, HYBE posted quarterly sales of 410 billion won and operating profit of 52.5 billion won in the first quarter of this year.

Against this backdrop, Kakao Entertainment is aiming to increase profitability by focusing on its lucrative music business. The cooperation with SM Entertainment should also bring further growth.

“As we plan a variety of collaborative business partnerships with artists and SM Entertainment management, the music business is expected to demonstrate stronger profitability and growth by creating economies of scale to vigorously fuel K-pop’s global expansion,” Bae Jae-hyun, Cocoa’s executive vice president, said during a earnings call in May.

Bae added that the company aims to gradually improve its profitability through restructuring and integration with its global story business platforms being the main cause of the recent losses.