Kakao CEO apologizes for SM stock manipulation allegations

Kakao CEO Hong Eun-taek apologized Thursday over a recent controversy surrounding alleged stock manipulation in connection with the tech giant’s acquisition of K-pop agency SM Entertainment.

“We apologize for causing concern to Kakao shareholders with the negative news that occurred during the process of taking over SM Entertainment's management rights," the CEO said at the company’s third-quarter earnings conference.

“We are faithfully (talking) to the investigative authorities regarding the suspicions. … We feel the greater social responsibility that came along with our business growth. We’ll reconsider the company's management system and reorganize the organization,” he said.

The IT giant’s Chief Investment Officer Bae Jae-hyun was absent from Thursday’s earnings conference, after he was placed under arrest last month for inflating SM’s stock price by investing some 240 billion won ($184 million) alongside other senior executives to win a bidding war against Hybe, the company behind boy band BTS, in February. Bae has denied any wrongdoing.

Last week, Kakao executives declared that the company is under emergency management. In a bid to strengthen its ethics management system amid public criticism, the firm decided to establish an independent organization, tentatively the "compliance and credibility committee” to supervise Kakao and its affiliates on the issues.

As part of Kakao’s artificial intelligence business strategy, the Kakao chief said the firm will launch an AI content bot on the Open Chat feature in KakaoTalk messenger “in the near future,” which will be a micro-vertical AI service that can curate tailored content to users.

The CEO’s specific remarks came in an attempt to dispel market watchers’ speculations that the release of the company’s upgraded version of Korean-language hyperscale AI model, KoGPT, may be postponed due to ongoing management risks.

“Some of our foundation models being developed by Kakao Brain in various parameter sizes have already been completed and we are in the fine-tuning process of open-source models that have been released globally,” he said. “We’ll apply our AI technology to services in cost-effective and practical ways.”

Before Thursday's earnings call, Kakao released its quarterly earnings reports for the July-September period before the opening of the Korea Exchange.

Kakao said its third-quarter operating profit fell 6.7 percent on-year to 140.3 billion won on a consolidated basis, which was slightly higher than the local analysts’ consensus of 127.4 billion won provided by market intelligence firm FnGuide.

Net profit plunged 63.9 percent on-year to 49.5 billion won. Meanwhile, it achieved record-high quarterly sales of 2.16 trillion won, up 16.3 percent from a year ago.

Kakao attributed the strong sales to the K-pop powerhouse's record-breaking quarterly earnings in profit and sales of 50.5 billion won and 266.3 billion won, respectively, over the cited period.

On the contrary, the IT firm's net profit dropped due to a sharp increase in its operating costs as it invested heavily in infrastructure for a new data center and restructuring its subsidiaries such as Kakao Entertainment and Kakao Enterprise.

On the back of the better-than-expected earnings results, Kakao shares gained 3.75 percent from the previous trading session to close at 45,600 won on Thursday.