HYBE Co., Ltd. (A352820) Earnings Call Transcript & Summary

[Interpreted] Good morning. Thank you for joining us for HYBE's Third Quarter Earnings Call. This is Lee Sangwoo, Head of the IR team. I will be moderating today's call, which will proceed through consecutive interpretation. Today, CEO, Park Jiwon and CFO, Lee Kyungjun, will first present the business highlights, future business plans and medium- to long-term growth strategies, followed by the Q&A session. Please be advised that today's earnings call is based on preliminary consolidated estimates under K-IFRS and are thus subject to change during an external audit. Now I will hand over to our CEO.

[Interpreted] Good morning. This is CEO Park Jiwon. On October 17, HYBE announced that steps are being taken for the BTS members to fulfill their military service. I understand that there are some concerns about potential impacts of their temporary absence on the company's business performance. So today, we will not only report on the third quarter earnings results, but also share our medium- to long-term visions and plans. First, CFO, Lee Kyungjun, will report on the earnings highlights.

[Interpreted] Good morning. This is CFO Lee Kyungjun. Let me walk you through the consolidated financial results for HYBE. In the third quarter, we recorded a revenue of KRW 445.5 billion, which is a 31% growth year-over-year. Of the total revenue of KRW 445.5 billion, revenue with direct artist involvement, including album sales, concerts, advertisements and appearances were KRW 206.2 billion, accounting for 46% of the total. Revenues with indirect involvement, including merchandising, licensing, content and fan club sales made up the remaining 54%, recording KRW 239.3 billion. Following the second quarter, several album releases and world tours of major HYBE artists in the third quarter contributed to the Y-o-Y growth of sales with direct artist involvement. But sales of tour-related merch, artist content and game sales recorded an even bigger growth resulting in the higher revenue contribution from the sales with indirect artist involvement. Let me give you more details by revenue category. In the third quarter, album sales recorded KRW 129.2 billion, they include a repackaged album by Seventeen, third mini album by ENHYPEN, a debut album by NewJeans and a solo album by j-hope. Seventeen became the first artist to sell 1 million copies with a repackaged album and ENHYPEN became a million seller in just 3 years. NewJeans sold 580,000 copies as of the end of September, setting the most album sales record as a debut group. In addition to their successful debut album sales, NewJeans is rising as a new K-pop icon with many offers from companies, including fashion and beauty brands, which raises our expectations for their future growth. Concert revenues totaled KRW 47.2 billion, including the world tour sales of Seventeen and TOMORROW X TOGETHER. The world tours by Seventeen, TXT and ENHYPEN are well underway with most concerts being sold out. We expect that they will be able to perform at larger venues next year and onward, thereby contributing to both our top line and bottom-line growth. Of the indirect involvement revenues, merchandising and licensing revenues recorded KRW 114.7 billion driven by the sales of all-time popular By BTS merchandise as well as the tour-related merch items by Seventeen and TXT. Content revenues posted KRW 107.2 billion in the third quarter, showing a constant growth trend. BTS Memories 2021 DVD and their concert video on Disney+ as well as the BTS IN THE SOOP: Friendcation were major contributors to the content revenues for the third quarter. Also, revenue from BTS Island: In the SEOM, a game launched in June was recognized as content revenue. In the third quarter, the operating profit posted KRW 60.5 billion, down 8% year-over-year. The Y-o-Y decline in the operating profit despite the top line growth was mainly because of the decline in the gross margin, and there are 2 major factors. First of all, the production costs of the audition program for &Team that premiered in July were recognized first before any revenue could be recognized because &Team will debut in December. As the group continues to grow in the future, the bottom line is expected to improve. The second factor is the higher rate of cost to sales associated with the beginning of off-line concerts by HYBE artists. The North American tours by TXT and ENHYPEN were their first tour since debut. So the concert venues were selected in a conservative manner. Since the seats were quite limited, their profitability was limited as well. However, we were able to identify high demand from fans for these artists as the world tours proceeded. So concert schedule for next year will be held in places with twice more seats than the venues this year, and as a result, we expect concert profitability to improve significantly. Moving on to Weverse KPIs. The average MAU in the third quarter is around KRW 7 million, up 16% Q-on-Q. With the opening of all-new Weverse in July, communications between artists and fans through Weverse Live were expanded, which resulted in more active utilization of the Weverse community functions by the fans. It is also encouraging to see the continuous MAU growth trend in the third quarter as well. In early August, performances by j-hope and TOMORROW X TOGETHER at the Lollapalooza were streamed using an advanced live streaming function and the Busan concert by BTS was streamed on the platform in October, which recorded more than 49 million views. As such, the platform received good evaluation from the fans. Going forward, many big events are scheduled to be live streamed on Weverse, which is expected to lead to a big growth in the fourth quarter MAU as well. Furthermore, for the first 100 days since the launch of Weverse Live, 810 sessions of live streaming by artists were held with 130 million accumulated views. As such, the Weverse community has seen both quantitative and qualitative growth through Weverse Live, including the growth in the number of new users and the number of visits. Thanks to Weverse Live, more fans visit and stay longer on the Weverse platform. So the total user payments as well as ARPPU, which measures average monthly revenue per paying user are expected to grow consistently. A wide range of activities by HYBE artists are planned for the fourth quarter as well, which will support a growth trend in terms of both the annual revenue and the operating profit. Seventeen will release a mini album titled Dream on November 9 in Japan and continue the Be The Sun tour in Japan and Asia until the end of the year. ENHYPEN's first regular album in Japan titled Sadame was released last week on October 25, which recorded the first day sales of 180,000 copies and topped the Oregon daily chart again. The group will continue their world tour in Japan and Asia. LE SSERAFIM came back with their second mini album titled Antifragile on October 17 and sold 570,000 copies in the first week, making the 14th place on the Billboard 200. This is the fastest entry to the Billboard chart as a K-Pop girl group, which demonstrates their popularity in the global market. &Team was formed through an audition, which will make a debut in December and carry out various activities. As our new artists have been growing exponentially, we expect that the amount of time taken to recover debut-related cost will be reduced significantly. Indeed, excluding BTS, revenues of the other HYBE artists increased threefold on average for the past 3 years, showing an explosive growth. I would like to ask for your continued support. Now let me hand over to CEO, Park Jiwon, who will present our medium- to long-term growth directions and strategies.

[Interpreted] Thank you, Kyungjun. Let me first comment on the future plans related to BTS. Last week, Jin released a single album titled, The Astronaut, and he will proceed to serve in the military according to the guidelines of the Military Manpower Administration. In the meantime, the other members will focus on solo projects in consideration of their scheduled military service. HYBE and BTS hope to see their group career resume in 2025 until which the members will engage in solo activities. I would like to ask for your continued support and encouragement for BTS. HYBE will continue to use the multi-label strategy for business growth. Today, HYBE has 9 independent labels in Korea, Japan and the U.S. that are producing great artists. We have created an environment where the creators can work under the most optimal conditions with autonomy and independence and the competition and collaboration are encouraged to achieve growth. This system of HYBE will be applied to the global market as well. In Japan, &Team, which was put together through an audition program will debut in the fourth quarter. HYBE America is working on a project to debut a girl group through an audition program with Universal Music Group next year. The 2 teams will be launched in Japan and the U.S., respectively, to offer K-Pop entertainment that caters to the music industry and the fandom of the respective countries. It means that HYBE will take on the initiative of applying its production process of talent discovery, training and debut as well as its business model of utilizing artist IPs for 360-degree business expansion across diverse countries and cultures. And this initiative will disrupt the paradigm of the global music industry. Likewise, we believe that the diversified artist portfolio helps us avoid the risk of concentrating on a certain country on a certain genre and allows us to flexibly respond to the changing external situations and trends, thereby reducing the overall business risks. Another strategy that HYBE is pursuing is to combine music and technology to offer new experiences for fans and expand the scope of entertainment business. I would like to discuss how we will expand the scope of HYBE's entertainment business through the platform business centered on Weverse and the game business and how we are going to pursue voice-based solution business with Supertone. First of all, Weverse is implementing the scale-up and scale-out strategy to advance the services and grow artist participation on the platform. Following the launch of live streaming technology, we are working now to offer new subscription services by adding various functions and we will continue to develop and offer services to not only facilitate communication between artists and fans but also support active communication among the fans. We also plan to strengthen the online and offline hybrid experiences centered on concerts and establish an ecosystem by introducing digital goods. Furthermore, we will expand the influence of the platform by inviting artists in Japan and the U.S. to join the platform. Our gaming business has produced some good results. BTS Island: In the SEOM, which was launched this year, has been welcomed by the fans and its success has gained much attention in the game industry as well. It is worth mentioning that it represents a rare case where again, based on artist IPs achieve success and that the successful result was achieved in just one year with less than 30 people working on the project. We will not just stop here, but we'll continue to secure influential game IPs through both in-house development and publishing services. In particular, we will be a publisher of a major game title developed by a leading Korean game company scheduled to be released next year. We will soon update you on this plan. We expect that the publishing business will not only generate profit for us, but also help us gain human resources and experience necessary to carry out technology-enabled entertainment business. Gaming includes a number of entertainment components, including music, and we believe that games will serve as a key pillar in the virtual world, such as the metaverse in the future. Therefore, it is essential for us to enter the gaming industry preemptively to prepare for this type of future. We also believe that greater synergies will be created when game business capabilities are added to our fundamental core capabilities of music and content creation. In addition, we acquired additional equity stake of Supertone, which is expected to be an important part of the technology capabilities that we wish to secure. We will provide new types of content and services by combining our content production capabilities and Supertone's AI-based audio and voice synthesis technology. We have also been thinking about B2B services using voice-based solutions. And in this regard, at the open seminar held during the Busan International Film Festival, we presented various cases of AI-supported creation and innovative technologies, and our presentations received much support and interest, which proves their feasibility. Our final strategy for sustainable growth is expansion through cooperation across boundaries. It is a comprehensive strategy that involves M&As, joint ventures, equity investments and partnerships. In order to expand the multi-label strategy, we are considering various partnerships and investments with labels, catalog companies and talent management companies in the overseas markets such as the U.S. and Japan, thereby strengthening our music IP portfolio. Through this approach, we expect that greater synergies will be created with our superior solution capabilities on concert, merchandising and content to deliver greater results. We're also considering to invest in or cooperate with companies that have differentiated technology related to the new businesses that we're promoting. HYBE will utilize the multi-label strategy to achieve diversity in our music business, conduct solution business for the enjoyment of our fans and promote convergence with technology across platform, game and AI. Through this approach, HYBE aims to be an innovative leader in the industry, expand the scope of our business and achieve sustainable and explosive growth. As has always been the case, HYBE will never be complacent, but we'll continue to move forward and search for solutions. As we venture into the uncharted territories, we may experience trials and errors and we have amazing plans to overcome these obstacles, transform the industry and take on new challenges. As we implement these plans one by one, we will make sure to share with the investors our achievements and our future plans so that we can write the next chapters of HYBE together. Moreover, we are considering medium- to long-term shareholder return policies, including share buyback and dividend payout to enhance shareholder value. We will be able to share with you more details in early 2023. We will do our best to ensure that the remainder of this year as well as next year will be the time for us to begin a new chapter and prepare for another leap forward. Thank you for your attention.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Lee Hyunji from Eugene Investment & Securities.

[Interpreted] This is Lee Hyunji from Eugene Investment & Securities. I would like to ask a question regarding Seventeen's planned activities for the fourth quarter. I understand that Seventeen will start their dome tour in Japan and also the city project will be carried out together. I'd like to know more about their scheduled album-related activities and concert-related activities and the expected results.

[Interpreted] As has already been reported in the media, Seventeen will begin its dome tour in Japan, starting with their concerts in Osaka on November 19, which will be followed by their concerts in Tokyo and Nagoya. And all these tour concerts will be carried out together with the city project. And so in each city, there will be 2 concerts for this dome tour. So a total of 6 concerts will be offered. But in the history of K-pop, it is only BTS and TVXQ who were able to have 6 dome concerts in Japan in one tour. So Seventeen is the third act who is able to do so. The city project was carried out in Las Vegas by BTS, and this is about utilizing an entire city to celebrate their concerts and various activities are carried out. So for Seventeen's dome tour and the city project in Japan, they will include the Nankai railway wrapping in Osaka and decorating the Skytree, which is a landmark in Tokyo with Seventeen color as well as various engagement and partnerships with cafes and hotels. So these 6 concerts will be planned for the fourth quarter, and we expect that there will be even larger venues scheduled for Seventeen next year. We had a concert in the Southeast Asian region with about 10,000 seats, but there was so much popularity in demand for Seventeen tours. As such, we have added 2 more concerts at a stadium scale venue in December this year. So we expect a lot from these concerts. You also asked about Seventeen's album-related news. As was reported, Seventeen, will be releasing its album in Japan on November 9. And when we take a look at the preorder situation, we expect the album sales will increase by more than 200%. So it's going to sell well in Japan.

[Foreign Language] The following question will be presented by J.J Park from JPMorgan.

[Interpreted] I'm J.J. Park from JPMorgan. I have 2 questions. The first one is related to your operating margin. I understand that you are taking on the multi-label strategy, which requires a large head count and there's inflation issue as well. So what is your overall margin outlook going forward? When we take a look at your strategies, it seems that they are mainly aiming at boosting the top line growth. But what about your bottom line? How are you going to guard your margin? The second question is related to your synergy with Ithaca Holdings. It's been more than a year since this deal was concluded and about KRW 1 trillion of investment was made. So if you can provide us with some numbers that can quantify the synergy effect with Ithaca Holdings, I would appreciate that.

[Interpreted] Let me comment on your question related to our margin outlook. As you mentioned, we are carrying out the multi-label strategy, and there are various new business models that we're pursuing. As such, there is some pressure on our margin side. Of course for this year, we expect our operating profit margin is going to be in the mid-10% because of the contribution from BTS activities. But starting from next year, the portion of revenue contribution from BTS will be reduced while the contribution of margin and top line growth from other artists will continue to grow. As such, next year, there may be even greater pressure on the margin side. But when we take a look at the gross margin by artists in addition to BTS, Seventeen, TOMORROW X TOGETHER and ENHYPEN, their margin is not very different from the margin of BTS other than the concert revenue. Therefore, as these groups continue to grow, I believe that margin will improve accordingly. In addition, our new teams, including LE SSERAFIM, NewJeans and &Team will continue to achieve growth starting from next year. So until next year, we may have some negative pressure on the margin side, but starting from 2024, we expect that our margin will improve. In addition, we continue to carry out new businesses by combining technology and music. And depending on the size of revenues coming from these new businesses, there will be additional upside on the margin side.

[Interpreted] Let me comment on your second question related to the outcome or results from our acquisition of the Ithaca Holdings. As you mentioned, it's been more than a year since we acquired Ithaca Holdings. And we have gone through the watch period, which is difficult for any M&A or M&A transactions. So the watching period is over, and we are now actively pursuing various opportunities in North America as well as potential expansion into the Latin American market. So there have been very specific synergetic results from this deal. First of all, we were able to have better or upper hand in terms of publishing and mastering rate negotiations in the North American market. And in addition, we were able to expand our artists activities in North America more easily. In the past, we had to put more effort and more time in preparing for initial cases or activities in the North American market. But now thanks to the support from Ithaca Holding, we're able to spend less effort and maximize the outcome from our artist activities in that region. And thirdly, we -- as I mentioned during my presentation, there will be Ithaca Holdings artists joining the Weverse platform in the first half of next year, which is expected to expand the outcome of the platform. And finally, we are also talking about and discussing how to expand successful business models such as Drew House of Justin Bieber and R.E.M. Beauty by Ariana Grande to Asia and other markets. So all these will produce good results and good synergetic effects between the 2.

[Foreign Language] The following question will be present by Lee Susie from Merrill Lynch Securities.

[Interpreted] I am Lee Susie from Merrill Lynch Securities. As the CEO mentioned during the presentation, it is not only BTS, but also various other business initiatives that have been pursued by HYBE. So we look forward to a lot of changes and positive results coming from these activities in the medium to long term. However, in order for the investors to understand how these medium- and long-term strategies will bring about earnings results, we need to have some numbers. So if possible, I would really appreciate it if you could give us a breakdown by artists in terms of their revenue contribution. For instance, you can break the revenue down between domestic and Ithaca artists. And within Korea, in addition to the BTS, what are the revenue contributions from Seventeen, TOMORROW X TOGETHER and ENHYPEN? You could give us some revenue breakdown as of the third quarter or the most recent available numbers as well as revenue contributions from the new groups such as NewJeans and LE SSERAFIM so that we can understand what kinds of revenue projections, so we can anticipate when there's no more group career or group projects from BTS for some time. The second question is related to your multi-label management strategy. So I wonder how much of a communication is taking place between Bang Si-hyuk, the founding member and the other labels. I wonder if the other labels are all operating in an independent manner and how much of an involvement of Chairman Bang is taking place? I would appreciate that.

[Interpreted] With respect to the revenue breakdown by artist, I hope you will understand that we cannot share with you any more details than have been disclosed. But based on the already available information, I'd like to give you some color as to how much of a revenue contribution is coming from different artists. First of all, as you can see in the audit report, the Ithaca revenue for the half of the year is KRW 100 billion. So the full year revenue from Ithaca Holdings is expected to be more than twice of that figure. As for the breakdown by artists, I cannot give you all the details, but when you look at the shareholder -- letter to the shareholders, you can see that the BTS revenue contribution this year is going to be between 60% to 65%, which means that the revenue contributions from Ithaca Holdings artists as well as the other HYBE artists will be about 35% to 40%. Going forward in the future, we expect that new groups, including NewJeans and LE SSERAFIM record more than 100% growth in terms of revenue contribution and the other artists are expected to achieve a very high level of growth between 30% to 50%.

[Interpreted] I'd like to answer your second question related to Chairman Bang's involvement in the labels activities. I'd like to say that he's not very much involved in the label's activities. He's mainly discussing with me and working with me to develop medium- to long-term visions and growth strategies. Of course, he is very much involved in the Big Hit Entertainment and BELIFT LAB related production activities as well as the production projects in the U.S. and Japan. But as for the production and content creation by Pledis and ADOR, he's not very much involved. So this again means that we continue to guarantee autonomy and independence of the labels under our umbrella so that they can continue to diversify their music portfolio.

[Foreign Language] The following question will be presented by Christopher Kim from CLSA.

[Interpreted] I am Christopher Kim from CLSA. First of all, I would like to know the ENHYPEN's financial contribution, both in terms of the top line and the bottom line. And the second is that Jin's solo album is selling very well so I believe that this will contribute to your earnings, but it's going to be recognized, I believe, as one of revenue contribution in the first half of the year. But when it comes to Jung Kook, he is pretty young. So as far as I know, he can postpone his military obligation by -- until 2028. So I wonder if he will continue to engage in solo projects until then. And moving on to my question related to Weverse. There has been a combination between Weverse and V Live. However, the MAU growth has not been that impressive. It is only 2% to 3% growth compared to the peak. But when the V Live function is completely shut down in the fourth quarter, what is your projection, the short-term projection for the growth of MAU?

[Interpreted] Let me first answer your question related to the financial contribution of ENHYPEN. As you know, we have the equity stake of 49%. So it is not subject to consolidation. So the profits from BELIFT LAB will only be recognized in terms of equity -- in terms of equity method valuation gains. However, we have the 3 pillar strategies in which the solution and the platform-related activities for ENHYPEN are carried out by us. Therefore, concert sales and merch sales and other revenues are recognized as part of the revenue for the solutions business division. Therefore, the entity-wise consolidation does not take place, but there are a lot of contributions coming from the platform activities and the solution activities related to ENHYPEN.

[Interpreted] I understand that your second question is Jung Kook's plan for his military service obligation. And this is a matter that we are executing after close consultations with the artists in question, so these will be taking place in a consecutive manner. But we just hope that we'll be able to see BTS as a whole team in 2025. And I hope that you will understand that this is my rather high-level answer. Then your third question was our MAU target for Weverse. We do not have any specific internal MAU target. We have integrated the V Live functions, and we were able to stream the BTS concert in Busan in October, and we have added a lot of new functions and features. And all of these are expected to contribute to the MAU growth. And with the sunset of V Live at the end of this year, we expect that there will be increase in the traffic. Of course, we have been managing the convergence and ARPU and other KPIs, but we don't have any specific MAU target this year, but we'll have to see what will happen in October till December. And starting from next year, I believe that we will have an internal MAU growth target. Thank you.

[Foreign Language] The following question will be presented by Lee Hye-In from Yuanta Securities.

[Interpreted] I am Lee Hye-In from Yuanta Securities. My first question is that you have seen a quite sizable nonoperating income. So can you explain more about this nonoperating income related components. And the second is that I can see that there has been some decline in your YouTube-related indicators, but I'm sure that TikTok and other social media networks have been able to make up for this decline. So what is the situation or revenue coming from these activities? And the third question is that you mentioned that you will soon introduce subscription services. So I'd like to know the time line of these.

[Interpreted] So as for the first question related to the nonoperating profit, we have a sizable -- we have sizable money in the foreign currencies. Starting from the early this year, we started to shift away from the Korean won to increase our foreign currency holding. And as such, the foreign exchange valuation gains were incurred. As for the second question, YouTube-related indicators will have to internally check the situation. But overall, the revenue side, there has been a solid growth. And third, the subscription services, we are expecting to launch them in the first quarter or early second quarter, you'll be able to see what kinds of subscription services we will offer next year.

[Foreign Language] The following question will be presented by Lee Eun-Hyung from Hana Securities.

[Interpreted] I am Lee Eun-Hyung from Hana Securities. First of all, I -- it is maybe because I don't know much about the Weverse's technology itself, but with the sunset of V Live, the V Live subscribers or users, are they going to be automatically transferred to the Weverse platform? Or are you going to carry out some promotional events so that you can absorb as many V Live subscribers as possible? And currently on the V Live platform, some JYP artists including Stray Kids and Twice have been operating and using this platform. You previously mentioned that you may not work with JYP artists or SM Entertainment artists, but do you think that these artists will be able to join the Weverse platform? The second question is about this girl group that you will launch in the U.S., and I believe it is crucial for investors to be able to take a peek, look at what kind of girl group will be formed through this audition. So I wonder if you can provide us with some more details as to the method of broadcasting this audition. Will this be on the YouTube platform or in other method? And it will be the first time that we will take a look at what is going to happen for this girl group. And the third question is about the valuation losses that were reported in the media. Of course, this is a nonoperating side. It does not have much cash implication, but you need to be able to have some conservative estimate to be able to see the full picture for this year. So can you provide us with some more detail?

[Interpreted] Let me first comment on your question related to the valuation losses from Dunamu Holding. And of course, we saw the news articles, but we are using the discounted cash flow method. Therefore and then after that, there will be an external audit and the final recognition will be determined. And so the loss recognition is not going to be as big as what was reported in the media. As for Dunamu, their financial statements have been made available for the first half of the year, and we'd see that their operating profit is at a solid level, and we see their potential and their operating side performance. So we continue to trust in Dunamu.

[Interpreted] And about your question of the U.S. girl group audition program, as for the specific method of broadcasting this audition, we have finalized pretty much all the details, but I hope that you will wait a little bit so that we can communicate with you more details in the future. We will make sure that the fans and the investors will be able to understand what will happen. The migration from V Live has already started on November 1. And so the migration process is well underway. So starting from November 1 until the 28th of December, for 2 months, migration activities will be carried out. And as for the transfer of membership information and the user information, it will be transferred to the V Live only when there is an explicit consent and agreement from the users. And moving on to the issue of migrating content related to artists from other labels. I understand that the V Live is currently talking with the other labels and other companies. And as soon as the details are determined, we'll be able to share with you.

[Interpreted] This is the end of the HYBE earnings conference call for the third quarter of 2022. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]