[COX] The Shadow of LG CNS's 'Expansion into External Business'… Reven…

Although LG CNS expanded its external business, revenue from its high-margin affiliate customers actually declined in the second quarter. While the strategy of expanding external business sounds promising, the decline in profitability highlights its limitations. / Photo generated by COXNEWS using Gemini (AI)

Revenue generated by LG CNS from its two largest group customers, LG Electronics and LG Chem, has actually declined over the past year. Combined revenue from the two companies fell from KRW 440.1 billion in the first quarter of 2025 to KRW 421.9 billion in the first quarter of 2026, while their share of total revenue also dropped from 36.3% to 32.1%. Although the company's push to expand external business is evident in the numbers, it also means that revenue from affiliated companies—where business volume was guaranteed and bad debt risk was relatively low—has declined during the process.

This analysis is based on LG CNS's quarterly report submitted to the Financial Supervisory Service and its 2025 annual report. According to the 2025 annual report, LG Electronics and LG Chem, disclosed as major customers accounting for more than 10% of revenue, still represented 34.8% of total sales, meaning they continue to account for roughly one-third of the company's revenue.

This trend becomes particularly noticeable when viewed alongside the second-quarter earnings. LG CNS posted revenue of KRW 1.5208 trillion and operating profit of KRW 127.9 billion for the second quarter of 2026. Revenue increased 4.2% year over year, but operating profit declined 9.2%, falling short of the FnGuide consensus forecast of KRW 1.557 trillion in revenue and KRW 137.0 billion in operating profit. The company explained that the results reflected increased investment to secure future growth drivers, combined with delays in contract schedules for certain affiliate projects.

During the second-quarter earnings conference call held on July 31, Song Kwang-ryun, Chief Financial Officer (CFO) of LG CNS, explained that the slowdown in profitability was not a structural issue caused by weakening business competitiveness, but rather the result of proactive investment for growth and temporary adjustments to project schedules. He also said that the delayed projects are proceeding normally and that earnings are expected to improve once contracts are signed and project execution accelerates in the second half of the year.

However, the contract delays in this quarter and the decline in affiliate-related revenue over the past year are separate issues. While they cannot be directly attributed to the same cause, examining them together reveals a point worth noting. The fact that contract delays occurred this quarter even in revenue from affiliates—previously regarded as stable due to guaranteed business volume—can be interpreted as a signal that differs from the company's explanation that the issue is merely "temporary."

The securities industry does not yet view the situation as serious. In a report dated August 3, LS Securities analyst Sun Yoo-jin attributed the weak earnings to a delay in the timing of revenue recognition under accounting standards. The interpretation is that the business itself has not deteriorated, but rather that revenue recognition has been pushed back. Based on this view, the analyst maintained a Buy rating and a target price of KRW 96,000, expecting next-generation financial sector projects and the expansion of data center design, build, and operate (DBO) businesses to drive earnings improvement in the second half of the year.

Given that the decline in affiliate-related revenue has continued for more than a year, the key factor for earnings improvement in the second half will be determining whether the delayed affiliate projects return as scheduled or whether affiliate business volume itself is entering a structural decline.