Kakao, the operator of South Korea’s most-used mobile messenger, is likely to see its profits nosedive in the first quarter despite its aggressive moves to expand mobile and offline businesses, analyst reports said Tuesday.

However, the company’s issuance of convertible bonds worth 250 billion won ($219 million) will clear the uncertainty over its funding needs, they said.

Kakao’s net profit in the first quarter is expected to have plunged 45.3 percent year-on-year to 22.1 billion won, and operating profit, a 32.7 percent decline to 20.7 billion won, according to estimates compiled by financial information provider FnGuide. The quarterly revenue is expected to have increased 2.4 percent year-on-year to 240 billion, the estimates showed.

Analysts attributed negative views on Kakao’s profits to slowing business in online and mobile advertising and a large marketing spending for new online-to-offline services including chauffeur service Kakao Taxi.

Some predicted that Kakao will continue to shift its focus toward O2O services and make them main revenue sources this year.

“Rather than seeking to maximize ad sales through mobile video or content distribution platforms, Kakao will be focusing on growing its new O2O services this year,” said Oh Dog-hwan, an analyst at Samsung Securities, adding that Kakao Driver and Kakao Hair Shop -- both fee-based services -- would have “a meaningful impact on the firm’s earnings this year.”

Kakao’s chief executive Rim Ji-hoon took the helm in August last year, but has so far failed to prove his competence to cash in on mobile messenger platform KakaoTalk and its accompanying services such as Kakao Story and Kakao Navi.

Kakao said Monday it will raise 250 billion won in convertible bonds in a bid to pay back bridge loans taken earlier this year to fund an acquisition.
 

The convertible bonds will come with a zero percent coupon rate maturing on April 14, 2021. The conversion price is set at 120,014 won per share and the conversion can be requested from April 14, 2017 to March 14, 2021, the company said.

Earlier this month, Kakao borrowed 800 billion won in short-term loans to fund its 1.9 trillion won acquisition of music streaming service provider Loen Entertainment. With convertible bonds, the company can switch 250 billion won out of the 800 billion won debt from short-term to long-term.

Kakao’s issuing of convertible bonds will clear uncertainty over the company’s funding needs, which has been weighing on Kakao’s share price, said Ahn Jae-min, an analyst at NH Investment & Securities.

“With the funding uncertainty clearing, the company can now focus on new services such as its mobile chauffer service and mobile hair shop reservation service, which will begin in the second quarter in earnest,” Ahn said.

“The conversion price of 120,014 won is 22.7 percent higher than the company’s stock price on Monday that closed at 97,800 won. This is a highly favorable condition for Kakao,” he said.

Buyers are seven local securities companies -- Korea Investment & Securities, Samsung Securities, NH Investment & Securities, KDB Daewoo Securities, Hana Financial Investment, Shinhan Investment Corp. and KB Investment & Securities.

The mobile messenger operator posted disappointing earnings last year. Its annual revenue came in at 932 billion won in 2015, slightly up from 898 billion won in 2014, but its net profit dropped by 120 billion won to 88 billion won on-year. Its net profit decreased by 64 billion won to 77 billion won during the same period.

In the fourth quarter last year in particular, the company saw its net profit drop 41 billion won on-year.

By Kim Young-won & Kim Yoon-mi 
(wone0102@heraldcorp.com) (yoonmi@heraldcorp.com)