LG CNS saw profitability worsen in the second quarter despite sales growth, due to increased investment in future businesses and the deferral of some affiliate projects. The company said results should improve in the second half as the contribution from AI and cloud businesses and next-generation projects in the financial sector grows. It also laid out a plan to focus on pilots and flagship references in manufacturing and logistics sites this year, then expand the physical AI business in earnest starting next year.
LG CNS said on the 31st that on a consolidation basis, second-quarter revenue was 1.5208 trillion won with operating profit of 127.9 billion won. Compared with a year earlier, revenue rose 4.2% while operating profit fell 9.2%. Cumulative first-half revenue and operating profit were 2.8358 trillion won and 222.1 billion won, up 6.1% and 1.1% from the same period last year.
Despite higher revenue, profitability deteriorated because investment in artificial intelligence (AI) increased and contract timelines for some affiliate projects were pushed to the second half.
Song Gwang-ryun, LG CNS chief financial officer (CFO), said on a second-quarter earnings conference call held that day, "The decline in operating profit is not a structural issue of business competitiveness but the effect of preemptive investment for future growth and temporary project schedules," adding, "The deferred projects are proceeding normally, and as contract signings and project execution ramp up in the second half, they will contribute to better results."
Second-quarter revenue from the AI and cloud business was 906 billion won, up 3.9% from a year earlier. The company said growth in AI platform and data build-out work, along with rising demand for managed cloud services (MSP) and cloud-based AI services, drove the increase.
Earlier, LG CNS strengthened collaboration in AI and robot transformation (RX) with major corporations including Nvidia, and conducted pilots to verify the applicability of physical AI and robot technologies in manufacturing and logistics sites.
Jin Yo-han, head of the LG CNS AI Center, said, "In the second half as well, demand for AI and data build-outs, GPU-based AI infrastructure, and cloud-based AI services will continue, showing a solid growth trend."
Second-quarter revenue in the smart engineering business was 274.6 billion won, up 3% from a year earlier. While existing affiliate work maintained a stable trend, external projects won in defense, shipbuilding, semiconductors, and pharmaceuticals were recognized as revenue.
Second-quarter revenue in the digital business services (DBS) segment was 340.2 billion won, up 6% from a year earlier. Large next-generation system build-outs in the financial sector led growth.
In the second quarter, LG CNS won contracts for KB Kookmin Bank's next-generation system and the Bank of Korea's information technology outsourcing project. Next-generation projects at Mirae Asset Life Insurance and Shinhan Investment are also entering full development.
LG CNS said it will focus on pilots and securing business references for the physical AI business this year, then expand in earnest starting next year. LG CNS recently signed a 189.7 billion won contract with LG Electronics to build physical AI infrastructure and will supply GPU-based AI infrastructure needed for Humanoid Robot training and the robot training and operations platform "PhysicalWorks." It also recently completed the first proof of concept (PoC) for physical AI conducted with logistics company Kurly.
Shin Jae-hoon, head of LG CNS's Smart Factory Division, said, "This year, we will focus on securing delivery capabilities through PoCs and field validations and advancing the PhysicalWorks platform," adding, "Based on that, starting next year we will expand the RX business in earnest centered on manufacturing and logistics clients, and we will also push to build intelligent robot training systems, including a robot data factory."
The company will also push overseas expansion of the smart engineering business. LG CNS has designated North America as the top-priority target market and is laying the groundwork for entry through participation in local exhibitions and discussions on cooperation with global IT corporations. In Southeast Asia, it plans to expand plant operations and control businesses based on LG Group's local production footholds, and in the Middle East, it will ramp up analytics and automation focused on the energy industry.
The DBS segment is expected to continue growth centered on next-generation projects in the financial sector in the second half. Typically, after kickoff, these projects go through analysis and design phases, with revenue starting to be recognized in earnest about six months later. Accordingly, the revenue contribution from projects launched early this year at NH Nonghyup Bank and KB Kookmin Bank is expected to increase as the year progresses into the second half.
LG CNS is also reviewing additional shareholder return policies. CFO Song said, "As a basic principle, we pay out more than 40% of net income on a consolidation basis as dividends," adding, "As with last year, we are considering an interim dividend this year as well."