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

Greetings. Thank you for joining us for HYBE's Fourth Quarter Earnings Call. This Lee Sangwoo, Head of the IR team. I'll be moderating today's call, which will proceed through consecutive interpretation. Our CEO, Park Jiwon; and CFO, Lee Kyungjun will, first present the financial and business highlights for 2022, including Q4, business plans for the future and the recently announced M&A, and followed by the Q&A session. Please be advised that today's earnings call is based on preliminary consolidated estimates under K-IFRS, and thus, subject to change after the external audit. Now I will hand over to our CEO.

Good afternoon. This is CEO, Park Jiwon. Thank you for joining our 2022 Fourth Quarter Earnings Call today. 2022 will be remembered as a very challenging year for us as we had to take on new challenges amidst numerous uncertainties. Last year, COVID-19-related restrictions forced us to reschedule artist activities, including concerts. BTS, HYBE's representative act, announced that the members would fulfill their military duty consecutively and engage in solo projects. In addition, we debuted 3 new acts and started new businesses represented by the launch of an in-house developed game. Despite doubts and concerns in the market, HYBE artists and employees were able to produce high-quality results and made significant achievements that innovated the entertainment industry while engaging in constant communication with our fans. We're pleased to share with the investors that HYBE is continuing its growth in diverse areas and has strategic plans for further growth. In the fourth quarter, under HYBE's multi-label structure, diverse HYBE artists gave a lot of joy and excitement to fans through their unique music and performance. BTS' Jin and RM released their solo albums and engaged in solo activities, which were loved by their fans. Seventeen, TOMORROW X TOGETHER and ENHYPEN were able to conclude their world tour successfully and met with their fans offline, which they were not really able to do during the COVID-19 pandemic. LE SSERAFIM and NewJeans had a fantastic first year and enjoyed an exclusive growth, thanks to a strong comeback after a successful debut. In Japan, &Team's debut attracted huge attention. HYBE did a remarkable job of launching these 3 new groups successfully. HYBE artists produced overwhelming achievements and their successes were confirmed not only in terms of indicators such as album sales but also in numerous TV music programs and year-end award ceremonies. This year, our artists are continuing to produce great results. First of all, NewJeans by ADOR released an album titled OMG early January, whose tracks, Ditto and OMG, are enjoying worldwide popularity. With the first week sale of 700,000 copies, the album has sold more than 1 million copies so far. Given the fact that their debut album, which came out just 6 months ago, also sold more than 1 million copies. NewJeans became a group that has 2 million selling albums in just half a year. In terms of chart performance, the group broke the record of being the longest #1 on various domestic music charts while staying on the Billboard 100 and ranking high on the numerous global charts, enjoying a syndrome-like popularity. In addition, the group ranked #1 in terms of reputation for brand advertisement, signing advertising contracts with global brands like Nike. The members are also serving as ambassador for several luxury brands, including Chanel. NewJeans has been demonstrating an unprecedented growth trajectory and influence, and I ask for your continued interest in what this group will achieve this year. TOMORROW X TOGETHER by BigHit Music has positioned itself as a leading next-generation K-pop act, selling 2.18 million copies in the first week of release. The group achieved double First Week Million Sellers in 3 years and 11 months since debut, and they are the first fourth-generation K-pop group that has more than 20 million TikTok followers, demonstrating their remarkable growth. TXT will begin the world tour from March this year at a scale much bigger than their last year's world tour. LE SSERAFIM by Source Music is getting a huge response in Japan with their Japanese debut single, Fearless. Their first week sales is 220,000 copies, recording high for Japanese debut album sales by a K-Pop girl group, topping the monthly single chart. The group will hold the first-ever fan meeting at the Olympics Hall in Seoul on March 18 and 19, whose tickets were sold out in just 5 minutes. Finally, BSS, a unit of Seventeen by Pledis, topped global charts with more than 600,000 copies of their album sold in the first week, which shows that Seventeen can continue their career and brand through diverse unit and solo activities. Again, I would like to emphasize that our artists were able to carry out numerous activities independently, in parallel, thanks to our multi-label system that started in 2019. It is clear why the labels, including ADOR, were able to achieve great success under HYBE's multi-label structure. The success of a multi-label system does not just simply hinge on the organizational structure where labels exist independently. For example, the most successful -- most important success factor for ADOR and NewJeans is, first and foremost, talented creators such as producer Min Hee-jin, who can break the mold of the existing thinking and lead the market. And their success is also thanks to the dedicated employees who share the creator's vision and pursue the vision through the independent operation system that enables completely independent creative endeavors as well as the label's infrastructure that can support various business ideas. In short, HYBE's multi-label strategy is all about respecting each label's unique color and character and supporting their expansion. This year, several new artists will be added through the lineup: first, a new boy group produced by Zico, a leader of KOZ Entertainment, will debut in the first half of the year; producer, Pop Time, who is known for numerous hit songs such as Tomboy, New Thing and Any Song, has joined the project to create music and content that are intuitive and easy listening. Much time and effort has been invested to prepare for the new group comprised of members that exhibit uniqueness and originality. Also, Pledis will present a new boy group within this year. As the first new act to be launched in 8 years since Seventeen, the group is preparing for its debut with talented members selected through domestic and global auditions. In addition, preparations for a girl group addition, jointly pursued by HYBE and Universal Music Group in the U.S. are well underway. Many people at HYBE are working hard together with globally renowned producers and songwriters as well as top talents who have produced successful top albums for many decades for this fabulous project so that they can -- we can expand the K-pop market further. I would like to ask for your interest and encouragement. You may also want to know about future plans of BTS, a group that has made HYBE what it is today. Until they join the military, BTS members will continue to pursue solo projects and interact with their fans actively. Jimin's solo album will be released in March, and SUGA will start his world tour in April in the U.S., Asia and Japan. Other members will also engage in diverse solo projects, and we will make sure to share them with you as soon as detailed schedules are finalized. Also, as fans desire earnestly, HYBE is not only supporting their solo careers but also working on plans for comeback as a whole group when BTS members finish their military service. We will do our best to support this, so we would like to ask you for your continued support and love for BTS. Along with the explosive growth of artists through vigorous activities, HYBE has also recently shared news and plans to maximize the global competitiveness of K-Pop and become more influential in the global music market. We announced on February 9 to acquire 100% stake of QC Media Holdings, a holding company of QC Music through HYBE America, which makes another step forward for HYBE to expand into the global music market, together with another major global music company following the case of Ithaca Holdings. Based in Atlanta, Quality Control Music Holdings has a strong presence in North America and urban music scene. Their acts include Lil Baby, who won in 1 Grammy and received 8 Grammy nominations; Migos, who played a key role in popularizing trap genre in North America as well as Lil Yachty and City Girls. As a result, we can expect music catalog revenue and management revenue, and their revenue contribution is expected to continue to increase with new album releases by QC artists and debut of new acts. Furthermore, this deal allows HYBE to expand its genre portfolio from K-Pop, pop music, country music to HipHop urban music, thereby building a top-tier lineup in each category and solidifying the multi-label structure not only in Korea and Japan, but also in North America. Finally, as we mentioned at the last quarter's earnings call, I would like to share with you our medium- and long-term shareholder return policy to enhance shareholder value. Going forward, HYBE will pay dividend and buy treasury shares each year within the range of 30% of the consolidated controlling shareholders' net profit. As the first step, we plan to propose a resolution item on the transfer of capital reserve to retained earnings at the upcoming General Shareholders' Meeting in order to secure a stable profit available for dividend. So far, HYBE was not able to secure income available for dividend payout due to structural changes resulting from split-off and merger. If there's enough support from shareholders on this proposal, HYBE plans to start to pay out dividend and purchased treasury stock in 2024, the earliest possible time for the implementation of the shareholder return policy. We will make sure to provide transparency and predictability to shareholders with respect to the company's financials and profit sharing and enhance the company's valuation by attracting a larger pool of investors. We ask for your continued support and encouragement for the future that HYBE will continue to create in 2023. Now CFO, Lee Kyungjun, will report on the earnings highlights.

Good afternoon. This is CFO Lee Kyungjun. Let me report on HYBE's consolidated financial results. The consolidated annual revenue for 2022 posted KRW 1.778 trillion, another record high with a 42% growth year-over-year. Operating profit was up 25% year-over-year to KRW 237.7 billion with an average annual growth rate of 27.8% for the past 3 years, OP margin recorded 13.4%. Yet, net profit posted KRW 33.9 billion, which seems quite low compared to the operating profit. This is mainly due to the operating -- nonoperating expenses, including impairment loss on goodwill for Ithaca Holdings and valuation loss on convertible bond. To give you more detail, Ithaca Holdings posted EBITDA of KRW 63.5 billion in 2022 with solid business performance in line with its business plan. However, KRW 80 billion of impairment loss was recognized in the process of goodwill valuation because of the rising discount rate on the back of the rising interest rates. In addition, convertible bonds issued in 2021 incurred KRW 40 billion of valuation loss, because its valuation is linked to our stock price. However, this cost bears no impact on the cash flow and the same amount will be recovered as profit at the time of bond repayment. There were also other nonoperating expense items that impacted our net profit. However, in terms of the actual cash flow, about KRW 360 billion of cash flow was generated annually from our business operation, which shows that our core business profitability continues to improve. Moving on to the fourth quarter results. We recorded revenue of KRW 535.3 billion and operating profit of KRW 51.7 billion. In Q4, the revenue grew 17% year-over-year and 20% Q-on-Q. As COVID-19 became endemic, revenue with direct artist involvement including album sales, concerts, advertisements, appearances and management was KRW 289.4 billion, accounting for 54% of the total revenue. While revenue with indirect artist involvement, including merchandising, licensing, content and fan club sales made up the remaining 46%, recording KRW 245.9 billion. Let me give you more details by revenue category. In the fourth quarter, album sales recorded KRW 149.1 billion, up 15% Q-on-Q and 74% Y-o-Y, mainly thanks to the BTS Jin and RM's solo albums and LE SSERAFIM's mini-album, ANTIFRAGILE. In 2022 as a whole, HYBE artists' performance on the domestic and global music charts was outstanding. First of all, in Korea's Circle Chart annual album sales chart, BTS, Seventeen, TOMORROW X TOGETHER and ENHYPEN and LE SSERAFIM made top 15. In addition, in Japan, HYBE artists were the only Korean groups that made top 15 in terms of the annual album sales data from Oricon chart. Among them, Seventeen sold the most copies, and BTS and ENHYPHEN were also loved by Japanese fans. In the U.S., BTS and TXT were the only K-pop artists that made top 10 on Billboard annual album sales chart. Considering the massive success of TXT's fifth mini album that is not even yet included in the chart, we expect the career of TXT to soar even higher in 2023. Seventeen, TOMORROW X TOGETHER and ENHYPEN held numerous concerts in the fourth quarter, resulting in the concert revenue of KRW 64.7 billion. Seventeen sold all the tickets for 6 concerts of the Dome Tour in Japan under the theme of The City Project, solidifying its overwhelming status in Japan. TOMORROW X TOGETHER and ENHYPEN also concluded their first world tour successfully. First, thanks to the strong support of their fandom, these 3 acts are expected to see the scale of their concerts more than double in 2023. Furthermore, LE SSERAFIM, NewJeans and &Team, all debuted last year, will expand their activities including concerts and fan meetings this year. Of the indirect involvement revenue, MD and licensing and content revenue recorded KRW 112.5 billion and KRW 115.1 billion, respectively. The video publications, including Love Yourself Tour DVD and Season's Greetings that look back on the year of each artist release at the end of each year were loved by fans and contributed to good results. The OP margin in 2022 was down 1.8 percentage points year-over-year to 13.4%. Given the 3 new groups who made a debut and expenses incurred due to Weverse integration and new game release, HYBE demonstrated very strong earnings fundamentals in 2022. Moving on to the KPIs of Weverse, a global fan community platform. The average MAU in the fourth quarter is around 8.5 million, up 21% Q-on-Q. The total user payments and ARPPU, which measures average monthly revenue per paying user, remained similar to the previous quarter. These indicators show that Weverse has been producing positive results in terms of MAU and customer retention since the successful integration with V Live in July last year. As the world's #1 fan artist communication platform, Weverse is now joined by more artists with a number of artist channels, which was only 36 at the end of 2021, increasing to 78 at the end of 2022, along with the increase in the number of postings by artists and their fans. As we announced earlier, Weverse will offer diverse new services this year. First, we will launch a new service called byFans in the second quarter, which allows fans to design and order their own merch. Also, we're working on various digital benefits that can be purchased with Jelly on Weverse, and they will be bundled as a membership subscription service and launched in the third quarter of this year. Through these services, we plan to transform Weverse into a comprehensive and sophisticated platform that can offer a lot of joy and fun for our fans. I believe many investors want to know more about the profitability of QC Media Holdings. Our value estimation of the business was 10 to 15x its annual average EBITDA, and we believe it is a fair valuation. In particular, their earnings in 2023 are expected to grow significantly year-over-year since its main artist, Lil Baby, plans to engage in various activities, including a large-scale tour, offline events and album sales. HYBE plans to develop joint business opportunities with QC, enhance its operational efficiency, and we believe we can maximize earnings by expanding the infrastructure. In 2022, BTS took the first step for the next chapter to become more mature as artists and new acts were finally reviewed after a long time of preparation, achieving unprecedented success. We launched a fandom platform Weverse after integration with V Live and demonstrated our game-related capability by launching an in-house developed game, In the SEOM. This year, we will focus on solidifying and strengthening these businesses further and once again demonstrate HYBE's DNA. As restrictions for offline events are all lifted this year, we expect more artists and labels to grow even further on the back of HYBE solutions and platforms. We would like to ask for your continued interest and support as HYBE continues its journey through ceaseless efforts for change in growth. Thank you.

[Operator Instructions] The first question will be given by Park Dongjun from JPMorgan.

I am Park Dongjun from JPMorgan. My first question is about the fourth quarter results. I can see that your top line growth was pretty good, but there has been lower margin compared to expected. So I wonder if this is a structural issue as you have more direct artist involvement revenue, or was it because of any one-off expense issue that incurred in the fourth quarter that had a negative impact on the margin? And the second question is related to your revenue breakdown by artists. You mentioned about TOMORROW X TOGETHER and NewJeans. If you cannot provide us with a breakdown by each artist, I would appreciate it if you could rank them in terms of their revenue contribution other than BTS.

Thank you for the questions. As for the first question, yes, you may think that the operating margin was lower in the fourth quarter than expected. And it is partly because, as you mentioned, of the increase in the direct artist involvement revenue, especially the increase in the concert revenue. In addition, we gave away some incentives for the employees at the end of 2022, which were recognized in the fourth quarter. Moving on to the second question, I would say that the other artists other than BTS would take up about mid-40% of the entire revenue. And when it comes to the ranking, Seventeen is #1, followed by TXT and ENHYPHEN and also followed by the new groups, including NewJeans.

The following question will be provided by Lee Hwa-Jung from NH Investment & Securities.

I'm Lee Hwa-Jung from NH Investment. I have 2 questions. First of all, there's a lot of talk about this situation with SM Entertainment, and I believe that there are 2 major points of criticism from SM Entertainment regarding HYBE's recent move. First of all, they're saying that there was -- this is a hostile M&A attempt and there was no agreement or consensus. So what is your position on this? And also, there are some people who say that SM Entertainment's valuation will drop after this deal. So what is your take on this argument? The second question is related to your platform plan. Phoning started in December last year, so it's been 3 months. So I wonder how this service is doing. And also, I wonder if this is part of the subscription service that you mentioned you will be launching soon? Or when do you think you will launch any paid-in services?

I am CEO, Park Jiwon. Let me address your question related to SM Entertainment. We do not believe this SM Entertainment stake acquisition as a hostile M&A. We are not hostile to any party, and we acquired the stake based on the mutual agreement with the majority shareholder. We also offered a tender offer to the minority shareholders under the same conditions. We have no intention of being hostile to any member of the management. However, I would also like to mention that the management of the company should represent interest of all the shareholders, including HYBE, which is now a shareholder of SM Entertainment. So I believe that the SM Entertainment management has to protect interest of all the shareholders, including us. And also about potential business partnership with Kakao, based on the assumption that Kakao has no interest in participating in the business management, if there is any business proposal that will benefit SM Entertainment, we will positively consider that. However, we have not been shared with us with -- from them any specific proposal for business cooperation. So it is too early for me to mention about it. Also, about some of the arguments that this deal will lower the value of SM Entertainment, I do not believe so, because as pretty much everyone knows, there will be a lot of synergies created when HYBE and SM Entertainment join hands. For instance, in the North American market, BTS has made a big success, and we have the local network and know-how that has been accumulated through Ithaca Holdings. So we can support SM Entertainment artists to expand their career in the North American market. And on the other hand, SM Entertainment has absolute superb infrastructure in China and also in the Southeast Asian market. This can be utilized for HYBE artists to expand into these markets. And I also learned about this multi-label structure plan announced by SM Entertainment. And as I mentioned during the earnings call, HYBE has been accumulating know-how and experience in implementing the multi-label structure for the past 3 years. And I believe that our skills, expertise and know-how can support SM's business support and growth. Also, I believe that HYBE can offer a lot of advantages in terms of corporate governance structure of SM Entertainment. First of all, we will be able to immediately improve the situation in terms of internal transactions and governance structure, because we have the right to resolve these issues without any transfer of goodwill or merger or any legal suit. And secondly, we will be able to be free from any issue of responsibility, because the current governance structure may have led to some of the transactions and some of the deals that may undermine shareholder value, but we are free from these kinds of issues from the past, now and in the future. So I believe that our presence in SM Entertainment will enhance the shareholder value immediately. Also, I understand that there are some concerns about conflict of interest between HYBE and SM Entertainment. In order to prevent such conflict of interest, we will have to strengthen internal control mechanisms. HYBE already has a very high level of governance structure that is actually the most advanced in the industry. So we will make sure that we can -- what we can do is to link KPIs of directors to the interest of SM Entertainment and their stock price. For instance, we can also have the various subcommittees under the Board, including the Compensation Committee and Internal Transaction Committee and Outside Director Nomination Committees that are comprised of outside directors so that there will be no further conflict of interest between HYBE and SM Entertainment. But still, you may think that there may be some concerns in the market, we understand that. So we may consider additional measures to improve the corporate governance structure, including the launch of an Audit Committee under the Board. For such ideas, we will gather opinions from the shareholders before the major shareholders' meeting of SM Entertainment. We'll have an opportunity to share them with the shareholders later. We're not really able to share with you any specific indicators related to phoning yet, so please understand. And as for a private chatting service, it's not going to be launch as a single or stand-alone service, but as per how it's going to be incorporated in the subscription plan, we're going to share with you when we have more details later.

The following question will be provided by Ahn Jin Ah from eBest Investment & Securities.

I'm Ahn Jin Ah from eBest Investment & Securities. My questions are actually follow-up on the questions that were already posed. So there's a lot of talk about your acquisition of SM stake, and I want to know more specifically about business synergies that you're expecting from this deal. And I'm sure you have a lot of these advantages in mind as you invested more than KRW 1 trillion to acquire their stake. And SM Entertainment seems to argue that there is a lot of conflict of interest in terms of business. So I wonder what kinds of benefits SM Entertainment can gain from this deal in -- from your perspective. And I wonder if the current struggle between the 2 companies will continue for some time or how these are going to be resolved. And secondly, I understand your point about governance structure improvement, but what about business synergy expectations? If you are able to gain, let's say, 40% of SM Entertainment's stake as planned, what kinds of specific business synergies or opportunities are you expecting?

I understand that you want to know the synergies expected between HYBE and SM Entertainment and whether such synergies will only benefit HYBE will also -- or will also benefit SM Entertainment. As was announced in the news release, Mr. Lee Sooman and Mr. Bang Si-Hyuk agreed on the need for globalization of K-pop, and that was basically the background behind this deal. So the key word here is the globalization of K-pop music. As was mentioned by CEO, HYBE already has extensive infrastructure and network in the North American market while we don't have much presence in China and have limited presence in Southeast Asia. However, traditionally, SM Entertainment has been very strong in Asia and has wonderful network and infrastructure. So for these 2 companies to share these networks and infrastructures in the respective regions, we will be able to complement each other and expand our businesses. And secondly, from the perspective of SM Entertainment, I read about the SM Entertainment Strategy 3.0, which is basically about building a multi-label structure, expanding the platform and using various IP for one-source, multiuse strategy for IP utilization, but these are the kinds of strategies that HYBE has been implementing for some time. So we have expertise and know-how and resources in implementing these strategies. So by providing what we have to SM Entertainment, we can support this company to implement these new strategies. Thank you.

The last question will be given by Kim Junhyun from HSBC.

I'm Kim Junhyun from HSBC. I have 2 questions. The first question is about your GPM guidance. You mentioned that there will be some new artists coming up for this year. So what is the overall guidance for your business performance? The second question is on expected benefits that you would like to reap by acquiring Quality Control Music. Compared to your deal with Ithaca Holding, how much of expectation do you have?

As for the guidance on GP margin, and we also have to look at the OP margin, we are going to do our best to make sure that our GP margin and OP margin trend will be maintained at the level of the fourth quarter. Moving on to your second question with our acquisition of QC Holdings, we have expectations in terms of financials and also in terms of business performance. So when it comes to the financials, they have both, the management business and the label business. And the label business continues to generate very stable streaming revenue, which is going to bring about stable cash flow for us. And in terms of business, it is -- has the benefit of expanding our genre portfolio and increase our presence in the North American market so that we can strengthen our bargaining power in the U.S.

This is the end of the earnings call for HYBE's fourth quarter. Thank you for joining us. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]