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

Hello, everyone. Welcome to AfreecaTV's live conference, also known as ALCON. I am BJ Kim Sang-Eun. We're already introducing to you the -- our performance highlights of 2Q of 2020. I can tell you that time really does fly. Well, as you know, ALCON is open to anyone who's interested in AfreecaTV. However, please understand that since it's related to our earnings, only those who preregister can ask questions via chat window. Today, we're joined by Mr. Jung Chan-Yong, our CEO; Kim Jiyeon, Head of IR; and our Manager, Chan Gyeong-Hui. Three people are here with us. First off, let's say hello to the viewers. Hello, everyone. How are you doing?

Well, I'm doing my best with the business, and it's been busy quite lately. And we are now wrapping up the first half of the year and sharing with you this morning our performance. We're going to also share the plans for the rest of the year and also plans for next year as well. Thank you.

Ms. Kim?

Hello. My name is Kim Jiyeon. We met you in April. And at that time, we were hoping that the outbreak would have been wrapped up by now, but it's not the case anymore. I hope that all of you are healthy and doing well and looking forward to your questions.

And Ms. Chan, what's the order of the business today?

Well, we're going to start with the performance and then have the questions.

Well, you need to say hello as well, Ms. Chan, as this is your first time appearing here today.

Well, my name is Chan Gyeong-Hui. Good to see you all. I'm very excited. And I am in the IR department. My name is Chan Gyeong-Hui once again.

You must be happy surrounded by all these beautiful ladies.

Right. This is very exciting.

Okay. Let me get into the gist of the day today. And while you listen to this performance highlights briefing, please ask any questions on this chat room, and we're going to take your questions after the briefing. Okay. So we have Ms. Chan Gyeong-Hui. It's all yours now.

All right. Ladies and gentlemen, let me walk you through business highlights of the second quarter 2020. The slide, please. Due to the COVID-19 outbreak, the [ anti ] culture that has reached deep into our lives has brought about many changes. Though challenges abound throughout our society, OTT industry is accelerating its growth. And in the midst of this changing environment, AfreecaTV is making every endeavor to use the current situation as an opportunity to lay a stepping stone for our growth. During Q2, large-sized sporting events did not happen, yet our talented BJs and AfreecaTV's original content played a big role in improving user experience. Also, during this quarter, we saw a meaningful increase in the number of active BJs. And many famous BJs signed deal with us, leaving the other platforms they used to be with, and some have come back to our platform, which helped drive the overall traffic and number of paying user. In particular, the uptick in the number of active BJs and paying user is an encouraging news for our platform's long-term growth perspective. And to keep this momentum going, we will make sure to provide better service to both our BJs as well as our users, bringing our platform to the next level. Also, building upon this strong ecosystem, we're developing an advertising solution which will help us to establish ourselves as a successful advertising platform. Let's now turn to the Q2 performance. Q2's total revenue recorded KRW 45.3 billion, which is a 9% hike Q-o-Q and Y-o-Y as well. As for the platform revenue, user traffic and number of active BJ climbed up, which also brought up the number of paying user up. Our paying users monthly ARPU also inched up, leading to a 13% increase in the platform revenue Q-o-Q and an 18% increase Y-o-Y. Now on ads revenue. Thanks to the ongoing online eSports, the ads revenue went up by 2% Q-o-Q. But due to the sustained impact of the pandemic, ad revenue is, in fact, a 31% drop Y-o-Y. On the bright side, though, we launched 4 new platform and products during Q2, and more advertisers are knocking our door for branded content advertisement. Given this, we expect to see a positive impact in the second half of this year. On top of this, we're currently working on advertising solution, which will be the basis for our advertising platform that will be launched next year. The platform will help expand the pool of our advertisers regardless of their size, and its targeting function will bring the overall efficiency up as well. Together, we expect to see the growth in the overall platform ads space. Last, on the platform, multi-platform revenue, Q2 reflects the revenue from the 18 Open Studios. Since these off-line PC cafés are directly affected by the pandemic, we had to cut their operating hours since March. Hence, you can see a 43% drop Q-o-Q. Now moving on to Q2 operating profit. Q2 operating profit was KRW 10.7 billion, a 33% increase Q-o-Q and 12% increase Y-o-Y. The OP margin was 23.7%, which is a 4.2 percentage point rise Q-o-Q and 0.6 percentage point increase Y-o-Y. This was largely due to growth in platform revenue, and I will walk you through the details of operating expenses in the next slide. Next slide, please. Next is operating expenses. Q2 operating expense was KRW 34.6 billion, a 3% increase Q-o-Q. Q2 BJ supporting payments grew 56% Q-o-Q after recognizing bad debt expense for allowances on new BJ points. And seasonality factors fueled online eSport production in Q2 compared to Q1, which is why contents production costs increased 31% Q-o-Q. Depreciation and amortization expense increased 17% Q-o-Q because CapEx on server expansion and eSport arena coliseum were recognized in the income statement starting in March and therefore fully recognized throughout the second quarter. Other expenses are variable expenses. Costs for dedicated line increased 21% Q-o-Q due to growing traffic. And paying charges increased 9% Q-o-Q due to an increase in the revenue from gift items. Additionally, advertising commissions that are linked to advertising revenue dropped 8% Q-o-Q. There were no other significant increases to operating expenses. Next slide, please. And last but not least, please refer to the statement of financial positions, and that will be all for today.

Thank you very much. I think Ms. Chan did an amazing job briefing us on the Q2 highlights. I don't think we have any questions yet. [Operator Instructions]

All right. Well, why don't I start with a question that I had for you guys? There are many areas that I was curious about and wanted to dive into. And now that I hear the briefings, I can see that we have seen more positive areas in this quarter, but as well, there were some negative areas and some differences that we did not see Q1. Let's start with the ARC, the AfreecaTV Road -- the new content. And I think this new content seems extremely intriguing. And my question is, do you plan to continue and expand on this kind of new contents?

Yes, of course. The platform business is our main area, but at the same time, this is directly related to content. And the content business is -- compared to film or drama, is not exactly the same. The environment, our experiences are not quite there yet, and -- but the pattern remains the same. We have the original content in the eSports space, and that is what we are doing. And I think this could also be applied in the traditional sports space as well. Well, in the eSports, our major leagues, as you know, such as LoL, and that's a large-sized league. But at the same time, traditional sports also have large-sized events such as soccer and baseball. But that's not something that we can do alone. That's why we're making partnerships with several other players as well. Now on the noncompeting sports area, that's not as competitive. So we're working with the sports associations or organizations to have more original content in that area. Working with Road FC is one of the examples that we can tell you. And badminton, ping pong is also something that we are doing. It's not as big size of an ARC, but we're still working on it. So traditional sports and especially these noncompeting sports is something that we are working on to acquire more original content.

Yes. I think our viewers really did find these to be exciting and interesting. All right. So we do have questions. The question says, Hi, I'm Kang Min-Joo. I'm a researcher from Daiwa Securities. The per user growth payout ratio and different user indices, could you tell us a bit more in detail about this and whether these indices will continue into July and onwards?

As we said in our presentation, we saw a significant increase in paying users. The growth rate was 12% Q-o-Q for the number of paying users, which is why we see it as a very encouraging trend. And the Q-o-Q growth in terms of number, there, the 4.1% are paying users, and which is why I definitely see this as a very positive trend. The growth in number of paying users will contribute and level up or upgrade the gifting culture that we have for Star Balloons.

Thank you very much. Next question is from Yu Incheol from Citi Securities. Number one question, what's the paying user ratio? I think it's about the same vein. Second is, what's the new ad product, and what is the type of it and schedule? The third question is about in-app payment launched by Google. What is your response to this? All right, that's something I wanted to ask as well.

All right. Now on the paying user ratio, it was already shared with you. Number two, new ad product. We have the new -- 4 new products that was launched this quarter but now -- right now it's in the beta format. What that means is that some corporate advertisers are enlisted as for testing period. And these 4 new products, the main -- one of them is the mobile banner. And compared to other platforms, we don't have as diversified ads products, to be honest with you. It was usually approval or banner. Now what we do is the banner as you scroll. So these are more of mobile products that we are working on since launch Q2, and we're going to launch even more. But we go through the test period first. So in other words, a beta service will be -- we'll have to be going through for some time. And that means the revenue will have to be -- will then recognize since next year in the full swing. And in relation to this, we are working on introducing a new platform solution. And it has a very well -- a good targeted approach, and there are many analytics tools as well with this. And I am thinking that with the new ad products and this new solution that we have, we're going to be able to expand the pool of our corporate advertisers to really bring the revenue of the ad up.

And the last part of the question was Google's in-app payment or IAP.

As for the IAP, there's no set policy at this point. And it's not just AfreecaTV but other platform companies and other providers are also thinking to how to respond to this. So we will have to be cautious and really watch how this trend is going to go through, and we're working actually to respond best -- effectively within our company as well. But fundamentally, our gift economy, this -- the Star Balloons, you have to charge and then use it. So at the time of the charging or topping up, we can ask them to do it on PC instead of mobile or we can ask them to use other platform on the Android and not Google if that -- if Google makes it mandatory. So we're not actually worried that much about it because it's not going to have a big impact on our platform to be more specific.

Thank you very much. Let's turn to the next question. Yes, the next question goes as such, I'm Oh Dong-Hwan from Samsung Securities. NAVER and Kakao's revenue recovered as of May, especially with ad revenue. What about AfreecaTV's monthly ad revenue since April? How has it been? What's it looking like?

The ad revenue trend is linked to the advertiser products and the differentiation between the ad products we have compared to NAVER or Kakao. We are more of a branded-content ad-based company with on- and off-line elements as well. So there is a difference between the #1 platform in terms of ad revenue. And with these types of economic cyclical shocks that we may see, there is definitely a negative impact. But in terms of branded content ads, there are some barriers or difficulties in off-line. But that does mean that the pandemic that has kept us from hosting off-line events, that has had a hit on our revenue, but we do now have demands from local governments and other off-line events. So we do see a pickup in terms of ad revenue since April. So in terms of the trend, it's not really a full recovery yet, but we are looking up. It is positive. The recovery is not on par yet with NAVER or Kakao, that's true.

Next question. Hello, I am Lee Moon-Jong from Shinhan Financial Investment. Congratulations on good performance even in the midst of COVID-19. What's the specific strategies related to ads? And can you give us the guidance for the second half of this year?

Well, what's the guidance, Ms. Kim? Do you have the guidance for the second half of the year?

Well, honestly speaking, let's start with the specific strategy for ads, which is the first part of the question. And well, I'm not sure if your guidance question was overall guidance or on the specific -- specifically on the ads. But if it were to be on the overall, although it's not official guidance, and early this year, we talked about the top line 15% increase, that was the initial guidance. And I think we are able to deliver that for this year because -- I mean if the situation continues from this until the second half. But the details will have to be changed. When we gave that guidance early this year, we were thinking more on the uptick of the revenue from ads, mostly on the gift item. But it turns out that the ads revenue are going to have to go down because of the outbreak. But gift items such as the Star Balloons are actually seeing bigger growth than we had expected. So although the details are not the same as we had given you in the early this year, but I think that 15% target we'll be able [Audio Gap] easily delivered by the end of this year.

All right, next question. Okay. So the next question is from Kim Sung-Eun from Macquarie, the same name as me. Large-scale platform-based live commerce is on the rise. Could you tell us about any related business plans at AfreecaTV? I think it's about the live commerce strategy at AfreecaTV.

Could you scroll up the chat box a little bit up, a little bit more, please? I think we had another similar question. Okay. Thank you. We talked about ads, and Ms. Kim talked about ads. But to add on, starting about 2 to 3 years ago, we've definitely been focusing on ads. Why? Not because we are extremely confident, it's because it's an inevitable path forward. I don't need to remind you that ad revenue comprises about a little over 20%, am I right? Of entire sales and revenue. So it's not a huge percentage, but the ad sector definitely does need to grow. And I think it's the strategy moving forward. Last year, our ad revenue was very positive. It was strong. Because out of the KRW 28 billion revenue last year, the league-related revenue was very significantly platform and sponsorship ad. Rather than that, the league ads were very strong in terms of revenue growth and -- which is why we have gotten sponsorships on off-line with eSports as well. But in this year, they have all been delayed and postponed indefinitely. So that is why we have revamped our focus towards this type of ad revenue and which is why we feel that it's inevitable and we need to do it. We can't keep to all the quarantine and disease control measures and continue to grow our ad revenue with the same strategy, which is why we are trying to refocus ourselves and try to get back on track. In Q1, we've already missed out on some ad revenue. So on an annual basis, it will have an impact on our annual revenue. We wanted to increase our ad revenue, but that's unfortunate because of the effect of the COVID-19 pandemic. The sponsorship and other platform ad revenue side, we have open ad solutions that we are implementing to enhance the efficiency of ads and revenue generated from that. So whether it be targeted ads or live bidding ads, we will continue to improve upon the strategies so that in next year, we can increase our platform ad revenue as well. But we're not just going to sit on our hands waiting until next year, which is why we are continuing to focus on our 6 new items that we're trying to translate into revenue. By -- next month, we will also have some new central ads as well that are currently on the ad side, but the engagement time is more than 2 hours, which is why the scroll down ads have some room for growth, in my opinion. You don't have the interim ads either, Ms. Kim. So -- but we do believe that that's a potential for growth, and that requires a combination of different environments that need to support that. So that is why we are trying to focus a little bit more on the interim or interim ads. So AfreecaTV's commitment to ad revenue is still there. It's still very strong. Last year, let's say, it was about KRW 30 billion, but we are not looking at just KRW 40 billion and KRW 50 billion. We're looking at KRW 100 billion in ad revenue. That's our target. So we have a very grand strategy and vision for ad revenues. So please keep that in mind. And before I move on to commerce, what I want to say about our basic ecosystem about paying users or ARPPU. The overall number of traffic, the traffic has been impacted. It's picked up, and the paying ratio has grown organically. But fundamentally, beneath all of that, what we need to look at is AfreecaTV's social media platform services. Those services need to be carried out smoothly and without a hitch, and we need a conducive environment for that. It's not about giving BJs guarantees. It's about the specific sectors within AfreecaTV that allow for this type of conducive environment. The most famous places will be the most popular places. People will gravitate towards that, which is why, especially in terms of eSports at AfreecaTV, we are dominant in the market. So that is why BJs are attracted to AfreecaTV and continue to join us. So that type of strong ecosystem needs to be there. And we are confident that we will continue to improve on our strong ecosystem. It's not just because someone transferred out or all of that. That, of course, has an impact, but we feel that the overall ecosystem itself will continue to grow, and we can say with strong confidence that it will continue to grow and improve. Last, our ads were definitely hit, and they decreased, but our ecosystem continued to grow. Starting from 2012, our ecosystem has continued to improve. And in 2016, there was a slight dip in our traffic, but our platform ecosystem is strong and healthy. And I think that is the highlight that we need to focus on. Now on the live commerce strategy, which was a main part of your question, right now, we have a product called Ad Balloon and [ coupon ] and Hmall. And I'm not too sure, but Ticketmaster are the traditional commerce providers. And they -- when if they are doing their business here on our platform, the users can give the balloons to -- or stars to the BJs. So that's, in a way, a combination of the commerce with our platform. So I mean we are talking a lot about the live commerce these days, and we are trying to find a way to tap into this space. But if you look at this industry of e-commerce, there are several stakeholders. There's the manufacturing part, also sales part as well as the logistics part and distribution part. There's also the promotion part all in that dynamics. And if you look at it, this bigger picture, there is definitely a place where we can target and tap into. But if we just approach in a distribution channel only, I don't think that'll be suitable. We don't have any DNA, so to say, in the commerce space, and users are not actually coming or visiting our platform for the purposes of commerce. So we don't want AfreecaTV to be the distribution channel in terms of this big commerce landscape. What we want is that -- actually, I'm seeing a change in the landscape of the commerce. What that means is more unique products are being launched in small quantity sometimes. This could be starting from the fashion industry. Also, distribution structure itself is going through some changes as well. And at the sales part and also at the promotion part, there are changes that we're witnessing right now. And in that new landscape, we are -- including ourselves, YouTube, Instagram and all that, the platforms like us, such as the new media, are joining, and influencers are also engaged. And I think that's the whole big point there. So it's related to ads, but this influencer ad space is a place we can tap into. So we can definitely utilize the influencers to expand the live commerce space that we can tap into. I think it's very clear where we can tap into. What we have is we have our users and influencers in our platform. And the issues at the product level is not something that we can directly tap into. I think it'll be better if we use partnerships there. So other traditional commerce companies, especially the ones that we have partnerships with the Ad Balloon, we can continue these kind of partnerships to source products, and then we can make them into content. So the commerce content can be made by us because commerce companies themselves cannot create those kind of contents. There are hurdles that they have to overcome. So I think we can provide that for them. So I think within this quarter, you -- we have to see the real live commerce shows. But last -- 4 years back, I was also a part of that project. We had what's called the shopfreeca, in which the sellers are actually broadcasting and advertising and the show. But it's not exactly the same as that. What we're doing is more targeted approach. And we're working with the partnership companies to have a better live commerce approach that we are thinking about. So you have to -- we'll see the third quarter and fourth quarter, and we'll continue to talk about it later on.

Thank you. Thank you for the 50 Star Balloon and gifts. The next question is from Jung-Yeon Seo from Shinyoung Securities. What is your long-term monetization business model for eSports? Right now, it seems that you're focusing on ad sponsorships from hosting competitions. What is your long-term strategy?

eSports is a big hit not just in Korea but internationally. But in terms of monetization, eSports still remains a question mark. Our eSport business, however, is different from other players because for us, we have a platform business that has the game content and for eSports as well. So on -- in the bigger picture, for us, monetization is a bit more significant. But if we just take out the eSports sector and look at that, the P&L is definitely balanced with ad sponsorships. That is the main, as our question says. Starting from the planning, production and operation of eSports, there are a lot of value chains there. And we have all of the elements that are required in that value chain. And we need to look at some areas in each of the chains -- in the overall value chain where we can enhance our profitability. But definitely, I do think that the ad part is the main.

Thank you very much. Next question, from Samsung Securities, Mr. Oh Dong-Hwan. Additional question here. Paying user and ARPU growth are very encouraging. My question is, in the future's focus, would that be on the growing ARPU of existing users or expanding the pool of viewers, which one?