Soop Co., Ltd. (A067160) Earnings Call Transcript & Summary

Good morning. Welcome to AfreecaTV live conference aka ALCON. Very good morning to you. I'm BJ Kim [indiscernible]. Thank you. ALCON is open to anyone who's interested in AfreecaTV. However, please understand that since it's related to our earnings, only fund managers and analysts can ask a question via chat window. Today, we're joined by Mr. Chan-Yong Jung, our CEO; Mr. Kim Joon-sung, our Vice President; and Ms. Kim Jiyeon, Head of IR. First of all, could you all greet those who've joined us?

Good morning. My name is Chan-Yong Jung. It's already year 2020. The January has passed and now we're in February. First of all, I would like to thank our new BJ, who joined us this year. So we'll cover last year and Q4 today. But I want to assure you that we are growing definitely, and we have some growth momentums that we'll definitely explain.

Well it's my first time, and I'm really excited. How about you, Gene?

Good morning. I'm Gene. Thank you very much for joining us despite your busy schedule. I look forward to great questions from you.

How about you, Ms. Kim.

Good morning. I'm Kim Jiyeon. So this is -- we're going to cover the whole year 2019. So I look forward to many questions.

Thank you very much. Okay. So how -- let's move on to the briefing. What's the order of business this morning?

First, let me briefly go over the earnings highlights for the -- 2019 and then take your questions.

Okay. So let's move on to the earnings report. Ms. Kim, take it over.

Slide, please. Here are the business highlights. In 2019, AfreecaTV focused on solidifying our existing business while building the basis for new ones. Thanks for our continuous efforts in making unique business models suitable for the new environment, our branded contents grew continuously and also built a foundation for growth as an open API and engaging platform by launching diverse services that expand the VOD services. Most of all, we've poured a lot of effort to ensure that BJs also grow with us since they are critical to content creation and community building. By making the operation of newbies zone a more sophisticated to foster new BJs, they received all the necessary support to take root and grow in our ecosystem. Also, we worked closely with existing BJs to create new source of income by various measures, such as supporting them with content production and expanding participation in branded contents. Furthermore, we newly launched User Clip, which is user engagement service, where any user can make a short video of an AfreecaTV broadcast and share instantly. Engaging users like this ensures not only stronger community, but also a solid basis for further growth as an open API platform. Also, we invested in eSports. To ensure a more stable eSports League operation, we established our own arena, AfreecaTV Coliseum. Along with the existing FreecUP studio, it is equipped with everything that will make it a leading eSports arena in Korea. It certainly was a fruitful year that celebrates many feeds, all thanks to your support. Now let me brief you on the earnings that reflect such business results. The total revenue of Q4 was KRW 43.4 billion, recording minus 3% growth Q-on-Q, but 16% growth Y-o-Y. Revenues from platform recorded minus 5% growth Q-o-Q, but 17% growth Y-o-Y. There were some changes in the fourth quarter that affected the revenues from payment system. First of all, PG Company used to handle the payments on KakaoPay, but the contract changed, therefore AfreecaTV manages this directly. For this reason, KakaoPay service stopped for 2 months. In addition, we noticed that the bad debt ratio for mobile micropayment was rising, so we increased the risk management baseline for payment, which in turn restricted payments of paying users with poor credits. In short, KakaoPay service 2 month-long suspension had an impact as well as the fact that users' payments were restricted after ratcheting up mobile micropayment risk management. However, these measures were taken only to maintain the health of our ecosystem in the long run, and KakaoPay came back in service in mid-December, operating normally ever since. On the other hand, advertisement revenue grew yet again, recording 8% Q-o-Q and 21% Y-o-Y. Even though platform advertisement decreased by 31% Q-o-Q, as the Lineage 2M preorder advertisement effect dissipated. Branded contents led the revenue growth in advertisement even during the low season for league production, recording 12% growth Q-o-Q and 18% Y-o-Y. In other advertisement, the revenues from G-Star and BJ awards sponsorship during the fourth quarter were reflected. The multi-platform revenue reflects the revenue from the 17 Open Studios operating nationwide. 14 Open Studio revenue was reflected in the Q3, and 3 were added in Q4. The yearly revenue of 2019 was KRW 167.9 billion, a 33% growth Y-o-Y. Revenues from platform and advertisement grew 28% and 49%, respectively. And multi-platform revenue grew tremendously by 75%, thanks to continuous expansion of Open Studios. Year 2019 was a remarkable year with high growth with advertisement revenue, especially branded content. Branded content, a new business model, has been tremendously effective and efficient for advertisers to expose their ad for a long period of time, continuously engaging users. Also, it provided BJs a new source of income aside from guests and, at the same time, relieved them from the burden of content production -- content development. We will continue to develop such effective advertisement products that will be beneficial for advertisers, BJs and users alike and contribute to a healthy ecosystem. Not only the usual game advertisers but also non-game advertisers are using branded content more and more. We foresee a continuous growth in year 2020 also. Next slide. The expense was about 32% decrease. And for the operating income, it recorded 16.8%. In the fourth quarter, the revenue decreased slightly, but there was the expense increase due to the event. The operating income in 2019 was KRW 36.7 billion, which is 35% increase Y-o-Y. And then also the income margin -- operating margin was 21.9% Y-o-Y and 0.5 percent point increase. Turning now to the operating expense. 2019 4Q operating expense posted KRW 36.1 billion, up 6% Q-o-Q, with the increase in ads revenue. 4Q's paying charge section saw a 6% increase Q-o-Q. In the Event section, G-Star participation and year-end BJ award cost around KRW 2.4 billion. On the other hand, as the game league season ended, content production expense dropped by 25% Q-o-Q. Operating expense for the year 2019 recorded KRW 131.1 billion, a 32% jump Y-o-Y. Compared to revenue, paying charge inched up slightly. That's because of the growth in the branded content revenue in the year 2019. Expense for content production also went up because we moved our stadium for PUBG League from Jamsil Open Studio to KR [indiscernible], which led to additional expense for new installation and operation. However, last year, we built AfreecaTV's Coliseum just for PUBG, which will allow us to enhance the level of our expertise in operating and broadcasting eSports league, and it will also help us reduce costs by eliminating the need to meet for installation and dismantling every time a game is held. In the Others section, with our bad debt ratio raised, bad debt expense also increased. There's no other section that saw an unusual increase in operating expense. The last slide is yearly financial statement. Please refer to it for your use. Thank you very much, everyone.

Thank you. [Operator Instructions] I was hoping to see questions here, but apparently, there isn't any. So let me ask questions that I've had in my mind for some time.

Well, we have what's called a User Clip, a new service at AfreecaTV platform. Now the viewers can participate and engage, which helps us to expand the VOD service. What is the situation now? How is the business going?

Well, thank you for the question. With the new feature called User Clip, we now have 4,000 clips every day uploaded. And PV, the actual people that viewing this, is also increasing. So this User Clip feature is apparently helping our overall service. I can see that. But what we need right now is advance this User Clip. Let's say, you are a BJ, you're very versatile, you're a great singer. Whatever you do, you have to put it in 1 minute and 30 seconds. Sometimes this isn't enough time. Now you want to expand it to 5 minutes, which we can do. Or Ms. Kim, people might want to replay your video, and this is available for -- at the User Clip service. And it's not just cut. You can also add editing function into this. So User Clip itself is already great content in and of itself. So that's what we want to do in the near future.

Okay. I can see that this User Clip and editing function is upgraded, and I was very happy to see that. All right. We still don't have any question.

Well, this is an earnings report, and I know, Ms. Kim, this is very new to you. Do you know the scale of the revenues of AfreecaTV?

Well, I had no idea the scale of the business of AfreecaTV or how much of a growth it has shown, and I'm very surprised and very interested to find out about this all reports -- earnings reports and everything. This person -- user has sent us 50 Star Balloons. Thank you very much. [Operator Instructions] Now let's go back to the question of the VOD. I can see AfreecaTV is committed on growing the VOD business. Now -- we now have this terrestrial channel as well. Can you tell me the hurdles in your attempt to grow VOD?

Yes, I think it's all about user experience. The VOD users are very used to the top platform, which is YouTube. And we need to at least match that experience, and it's not easy. I may not be accurate, but SMR is not exactly the same as YouTube. YouTube introduced it, but it's slightly different. So I need -- we need to set ourselves apart. This could be speed and the amount. YouTube, uploading takes some time, but User Clip, you can do it in real-time. And uploading on YouTube is just 1 click, but on the User Clip, you can -- we see 4,000 per day already, and this can expand to 10,000 and even more. So this means that for a user, this is a great motivation for the user stay on and use a VOD service here on AfreecaTV, not anywhere else. And the BJs videos and the contents that we have on AfreecaTV is the basis -- can be the basis. And when we have the portion in the pie, we can start from there to expand.

Thank you very much. I actually have more questions, but there is a question already.

I'm Kim Han Kyung from eBest Securities. I would like to see your guidance for this year's gift economy and ads business. And I would also like to know the onetime event impact in the 4Q?

Yes, I can give you guidance for 2020. You asked for the 2 areas, one is the gift economy and the other is the ads business. I know I'm the CEO, but it's very difficult to predict. You know about this novel coronavirus, and this is very, very fleecy. It is -- what I want to say is that more than just predicting, our commitment is more important. We always said that the operating income should be around 20%, and that's our goal going forward. We have now a bigger pie. The scale has grown up. So the percent -- keeping the percentage means we need to see even grow -- much growth. But I believe that one-person media has not matured. It's only growing, early stage, I will tell you. So by the growth rate, either the ads or the gift economy or the total portion, I think we can grow by 15%. That's the target. Growth rate, 15%. Now 4Q's onetime impact, I cannot tell you for sure, but I -- given that we have rebounded a little bit in the first quarter of this year, I think there is some very temporary impact coming from December of last year.

I'm so surprised. Yes, there's analyst, Kim Sung Eun from Macquarie. Very close to us.

I'm Kim Sung Eun from Macquarie Securities. ARPU trend since Q1, did it recover compared to Q4? What will drive ARPU growth in the coming year? And how -- so that's the first question. I think it recovered, right?

The revenue decrease in Q4 was not because of the ARPU, but the decrease in the paying users. And the reason why we had less paying user is that because of the micropayment RM was -- that became more restrictive, and also we had the KakaoPay issue. So those with low credit could not make a payment. So -- but still it's going on pretty well.

So the second question was, how will you expand your user bases and paying users? What are your strategies?

Well, can I add to the first question?

You know what ARPU is? Oh, wow, you know.

I studied. I did my homework.

So it's daily pay by -- per person. So if it's in growth, in terms of the payment, when it's starting from the KRW 30,001 to now it's KRW 128,000, so 1 user spending the KRW 30,000 or KRW 50,000, if you think about that point, we -- I think we have been thinking about, will that even increase from then on? However, we're in a situation where the digital culture is there, and there's the loyalty also. So ARPU, I mean it's not going to increase automatically, but as long as we have a healthy cushion, so for example, BJ Kim Sung Eun, you have your own fans and you have your own system, then if that system works, then the ARPU will go up. There's definitely room to grow. To answer your second question, to expand user bases. The users who are already with us, they have reasons to come. They want to communicate with the BJs, and they want to see those contents. But those who did not come to us, we have to motivate them to come in. So we need something new, or we need to publicize what we already have. Like, for example, we have this good food and we want you to come and enjoy, or we have a new menu, so you have to come and join. The reason why we are expanding those user engagement services is to have those new inflow of users. And BJs also play a critical role here. For example, in special event like World Cup in sports or in game, in LCK, there are some onetime users who come in to consume those content. And in order to retain them, we need something new, something else. But those live services, until we have a strong community, it's very hard to retain those people who come in just for one event. So basically, those people come in to watch a match and they leave. So to address this, we need to have contents -- good contents in non-live contents. So I think that's the VOD. So for example, oh [indiscernible] BJ is very famous and I come into AfreecaTV and I look around for [indiscernible] but then he's not here and then I -- but then, if I come in here and if I look for [indiscernible] and if I have all these contents already created, then I will stay. And also, we have audio -- we're going to do an audio service also. So I think the video market and audio market are different, but definitely, there's a synergy that we can tap on. So we are going to expand our basis to have those users and encourage new users. However, we need those users not just from just viewing, but to actively be engaged. And that basis is log-in. So from the perspective of users, just simple viewing of content, that's passive viewing. So in order to make sure that they become more active, we have to have something for them. But for us, transferring our regular users to log-in users, that's easier, slightly easier than attracting new users because they were here once, and they had -- they participated here. So we have those already in pool that we can transfer to log-in users. Yes. So you're going to do some cool things.

Next question is from Meritz Securities.

My name is Kim Dong-hee. We have election, Olympics and many other events slated for this year. How is this going to impact your business? And how are you preparing for these events?

Well, we have events every year. Sometimes Olympics could be something that we had intended for, but it doesn't work out. Sometimes we didn't intend for, but we have like an exclusivity or something like that. Now election takes place every 4 years in Korea. It's a big issue. I am sure that these events will have an impact to our business. And I mean impact by positive impact. So like I said earlier, we want to have new users come in, and we have to make sure when they come in, there are elements to keep them stay. And we'll try to utilize and leverage these great events.

And just to add to it, we had World Cup before, and there were many users. But I will tell you, to be honest with you, the retention rate was very low. One of that is because we didn't have the recommendation system or the VOD. It wasn't good enough as it is now. And although it wasn't, right now, we have great systems for VOD, so I believe the retention rate may go up this year and going forward. Yes, we look forward to the events like that.

[indiscernible] Securities. I have a question about gift economy, gifts. Except for BJs of visible radio, other BJs depend more and more on YouTube ad rather than gift economy as they become more famous. I think that will harm the gift revenue in the long run. What are your comments -- to our CEO?

Well, I can't deny that it's not happening. But still, just like the Pareto principle, in YouTube, we have profitable creators and not so profitable creators, and in AfreecaTV, too. BJs have different source of income, right? And where does that major source of income comes from? That's different case-by-case. However, YouTube is on the rise and their ad volume is -- advertisement volume is basically on the rise. So what if that's -- that takes even bigger momentum? I think that's his question. Well, we have to focus on our gift economy. We have to expand gift economy. So for example, for Star Balloon storytelling, what was that, the 50 Star Balloons? So those star -- storytelling using Star Balloons, that's also taking shape, and OGQ market is collaborating with emojis. So we have those emojis made with OGQ. So we have to make those upgrades so that we can have some influence -- we can wield some influence in the VOD market. Who makes the most profit out of VOD? How much -- I think it's like several million won. Either 5 or -- yes, less than KRW 10 million. So those people -- they -- since it's a good source of income, they focus on VOD, and that's a good cycle. How about you [indiscernible] in terms of your source of income? What's your personal business model? How many business models do you have?

Well, my major source of income is AfreecaTV, and I used to do YouTube, but I stopped doing YouTube recently. I thought I need to get organized, and I feel like I'm kind of all over the places. So I want -- just like I'm doing book contents in AfreecaTV, I kind of want to renew myself, renew my contents. So I need to take my time. But right now, I'm focusing mostly on this platform. But for me, YouTube, I was never profitable on that platform because of the editing costs. Yes, the editing cost is there. So...

Yes. So listening to BJ -- other BJs, I heard it's not so easy to make profit on YouTube. Yes, so how many subscribers do you have?

I have 37,000, not so many. But what's interesting is that on my page, if you look at the statistics, I think it's the same thing for other BJs, but there was -- out of the viewers, there are so many non-subscribers. Okay. We have a question here.