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

Welcome to AfreecaTV live conference aka ALCON. I'm BJ [ Doyotivi ]. Great to see everybody. 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 who registered with us can ask questions via chat window. Today, we're joined by Mr. Jung Chan-Yong, our CEO; Ms. Kim Jiyeon, Head of IR; and Ms. Chan Gyeong-Hui, IR Manager. First of all, could you say hello to those who joined us?

Hello. Great to meet everybody. It's my first time meeting [ Doyotivi ] because of the off-line business being really sluggish last year. And until today, I think I had less chance to meet with BJs. And I'm sure our roads have crossed before, but I think one of the reasons that I haven't seen you, so far, was because of the off-line business being slow. Well, last year's review and this year's plan will be discussed during ALCON, so I look forward to the fruitful discussion today.

Thank you very much. How about you, Ms. Kim? Can you say hello?

Yes. Hello. I'm Kim Jiyeon. While it's already 2021, it's already been -- it's the second year already and we have launched many things, and we will do our best so we can give you good news. So please stay tuned. And I will be happy with communicate with you and answer all your questions.

Thank you very much. And Ms. Chan, I know that you're really camera shy, but can you say hi?

Yes. I'm Chan Gyeong-Hui. It's very good to see you again.

Well, personally speaking, it's my first time joining with you for the IR review, and I'm also -- I invest myself, so I was also looking into the possibility of buying stocks. So I have keen interest in today's ALCON, myself personally, so I look forward to a fruitful time today. So what's the order of business this morning?

First, let me briefly go over the earnings highlights of Q4 and year 2020, and then I'll take the questions.

Okay then. Now let us move on to the earnings report. It's all yours, Ms. Chan, IR Manager.

Can you put up the slide, please? Here are the business performance and our earnings highlights of the Q4 and year 2020. During the year 2020, AfreecaTV reserved no energy to create more value of 2-way services made together with our platform and BJs and users. By adapting user-friendly services, we put much effort to improve service experience. Also, by strengthening our contents with expanded partnership, we created an ecosystem that actively engages both BJs and users. Even during the difficult times of pandemic, our BJs led voluntary works and launched campaigns with hopeful messages. Doing so created meaningful contents as well as helped establish a positive and a mature culture. AfreecaTV, our BJs and users will come hand-in-hand to exercise positive influence through contents. Now let me walk you through the earnings highlights of Q4 and year 2020. The total revenue of Q4 was KRW 60.3 billion, recording 20% growth Q-o-Q and 39% Y-o-Y. With strong performance, both platform revenue and advertisement revenue grew remarkably. As both the [ ARPU ] and paying users improved, the platform revenue of Q4 recorded KRW 44.8 billion, increasing by 8% Q-o-Q and 40% Y-o-Y. Advertisement revenue also recorded KRW 13.8 billion, thanks to the high season, with a 97% growth Q-o-Q and 60% growth Y-o-Y. Game advertisers drove the branded contents revenue as their demand grew significantly. Platform advertisement also saw a constant rise of demand in the second half, resulting in a consecutive revenue growth from Q3. Lastly, the platform revenue reflects the revenues from all 15 Open Studios nationwide. Open Studio, which is an off-line business, is experiencing some difficulties because of the pandemic, but we are reviewing various measures to minimize the loss. Yearly revenue of 2020 was KRW 196.6 billion, growing by 17% Y-o-Y. The platform revenue was 109 -- KRW 159.9 billion, increasing by 24% Y-o-Y; and advertisement revenue was KRW 29.4 billion, increasing by 2% Y-o-Y. However, multi-platform revenue decreased by 50% Y-o-Y, recording KRW 3.8 billion. Year 2020 was meaningful in that user engagement improved in the platform business, leading to the growth of per capita payment amount and overall paying user number. In 2021, we will continue pouring efforts into service upgrade, content diversification and better user experience to ensure a continuous organic growth in the platform revenue. Ad business in the first half of last year was a bit sluggish because of difficulty in esports games and matches as well as executing branded content ads due to social distancing measures. However, the numbers quickly turned around and even performed a lot better in the latter half, resulting in the growth of annual ad revenue. We will continue our endeavor for a significant growth in advertisement in the coming years also. We're coming up with ways to improve platform ads by listening to the advertiser reviews on the new ad products and trying to expand inventory by adding in mid-roll commercials to all videos. The new advertisement platform is also well underway for the launching in the first quarter this year. Due to the pandemic-driven changes to sales and operation environment, we believe advertisement platform will have even more importance in the future. With this, we're trying to make our platform more advertiser friendly by upgrading services based on accumulated data. Furthermore, we witnessed yet again the big potential of branded contents in the Q4 2020. Our goal is to expand its bases by securing more new advertisers, increasing collaboration with partners and expanding it to commerce. The operating income of Q4 was KRW 17.2 billion, which is a 22% growth Q-o-Q and 135% Y-o-Y. Operating margin was 28.4%, growing by 0.3 point -- percent point Q-o-Q. This growth was a result of the leverage effect of rise in platform revenue and advertisement revenue. Annual operating income was KRW 50.4 billion, recording a 37% growth Y-o-Y. And operating margin was 25.6%, growing by 3.8 percent points from last year's [ 22% ]. Now I'll give you details on the operating expenses. Turning now to the operating expense. 4Q's operating expense posted KRW 43.1 billion, up 20% Q-o-Q and also another 20% up Y-o-Y. Expenses for league operation and original contents production went up, driving the contents production expense category up to KRW 3.7 billion which is a 57% hike Q-o-Q and 73% hike Y-o-Y. Also, events such as [ year-round ] BJ awards ceremony and FreeCon drove the expense in the event section up to KRW 800 million, a 233 increase Y-o-Y, but since such events took place virtually, it recorded 67% decrease Y-o-Y. As for variable costs. Within an increase in the production -- with an increase in the production of branded contents, 4Q's commissions and service charge recorded KRW 7.2 billion, a 219% increase Q-o-Q and 33% (sic) [ 153% ] increase Y-o-Y. Upward trend in the gifting economy drove the paying charge up to KRW 5.4 billion, a 12% increase Q-o-Q and 33% increase Y-o-Y. Operating expense for the year 2020 recorded KRW 146.2 billion, a 11% jump Y-o-Y. Labor expenses for the year 2020 posted KRW 43.5 billion, up by KRW 4.5 billion Y-o-Y, but its portion against revenue is actually a 1 percent point drop. And depreciation and amortization recorded KRW 13.7 billion, up by KRW 2.9 billion due to the expansion of the colosseum and servers, but when put in context against the revenue, it's also a 1 percent point drop. One section in the expense that saw a hike against revenue is the commission and service charge, which posted KRW 12 billion, up by KRW 3.6 billion Y-o-Y. This is driven by an increase in the ads revenue from the branded contents. No other sections saw an unusual increase in operating expense. The last slide is the yearly financial statement. Thank you very much.

Thank you for walking us through on the highlights of the earnings. We don't see any questions yet. Do we have any question? Okay, nothing. Well, if that is the case, I want to remind you that you can ask any question. And when you do ask a question, please let us know your name and the organization that you belong to. Well, if there are no question from our analysts, why don't I start with one question that I've had in mind for a while? So if that's okay, let me shoot some personal questions. Well, as you know, I'm a BJ myself. And recently, I was very happy with the SNS-linked login function that was added to the platform. And that has helped us use the -- such programs. I was wondering if this new addition has helped the login number to increase. I actually have my login private for my personal information, but now that it's connected or linked with the SNS, I feel like I became an influencer of a sort with more following, a broader following. What do you think?

Right. There are 2 things that you mentioned. One is from the perspective of the users or the viewers. They have to use -- go through procedures to create a login in the Afreeca platform, but now that they -- we have a new function added to it, they can easily just use all the information that was already up on the SNS or the social network to just use the same services. I think it does have a -- some sort of an impact to the login, but we don't know for sure how solid that is because we've only used that function for 1 quarter only. So we have to look and see what -- how that works out. What we can tell you for sure is that we have more contents in the AfreecaTV, and we have more channels. And that's -- because of that, new users can now easily overcome this hurdle of making an account, thanks to this new program. We do see a lot of people logging in to our AfreecaTV platform using their other IDs and the social network. And another thing is that, for the BJs, they can do their works or they can perform both on AfreecaTV and other platforms as well. And now -- we now have the links where the users can easily check all the works from all the channels and the hostings of the -- one particular BJ in just one glance. So it's a lot easier for BJs and viewers as well. This -- again, this has been a very new addition. That means that we have to wait to see how this unfolds, but I think instead of having to check every single different services at different views, it's now easy for viewers to check everything on one page, which is basically a one-stop service to everyone and, I think, is -- has a great value in the future.

Yes, it is very convenient, and it was easy for us and for them as well. Okay, I think we do have a question. Can you give us this year's ad revenue guidance? And when will the ad solution be launched? And how much impact do you expect?

Well, for the 4Q 2020, the ads took up a large portion in our total revenue. The first 3 quarters saw a decrease in the ads revenue due to the COVID-19 pandemic, but the 4Q saw a rebound, thanks to the -- to improvement in the COVID situation and also our great efforts. I don't think we can give you a clear guidance at this point, but as you know, this year, 2021, we'll be launching a new ad solution and this is for the platform as -- and this will give a big momentum to this section. So overall, revenue of the ads isn't going to change -- is going to change a big time over 30% -- over 20%, I can -- I will say, but I'm not going to give you -- I'm not going to be able to give you an exact number because I need to have an internal discussions here. But we do hope to see a big jump there. For the branded content section, we definitely saw more than 15% [ decrease ] compared to last year, less than 20%, right?

Yes, that is correct.

And the branded contents, I have no doubt it will continue this upward trend, but for the platform ads section, it's a little different system. We're not only using the real-time bidding system. We have more programs on top of that. We have the pricing mechanisms. We have the inventory management system. And we want to make sure that we attract the small- and medium-sized advertisers, not just the big-sized heavyweights. And we have a plan to actually give an improvement in the services themselves, what -- means that the potential for this platform ad section is quite large. And it's not a 15% or 20% which is an organic growth usually, so we're looking at something a lot higher than that.

"[ I'm from Yuanta ]. Reasons for remarkable uptick in branded contents revenue. I want to know those reasons. And what is your expectation for 2021?"

Well, yes, as I elaborated previously, our expectation is similar. And why do we see that uptick is that -- I think the advertisement is impacted by the environment for advertisers, while the -- for game advertisers, our platform is really the most optimum one. So the new game titles being launched, that is a big influence. And what's more important is that the AfreecaTV as a platform itself needs to have more value. And we are seeing the evidence that we are being recognized outside the game industry too. And looking at how the bidding goes, we can see that we're performing quite well. So in a -- we feel that we have expanded our advertisement realm.

Next question. When are you starting to add real-time mid-roll ads? And when do you expect to see the impact? Also, how about the numbers or the trends that you see for the PU ratio or PU? I think there was a question right above that. I think it's the same question. Okay, I think it was already answered.

Okay, now to this question that was just raised. The real-time mid-roll ads is newly -- is going to be newly added this time. To give you more context: In the past, we had the display ads product and we also had the mid-roll ads, but they were separate. They were 2 different products, but they're the same thing basically in terms of the contents, which means before or during or after a show, there are video ads that are running. But before, we had put them into 2 categories. For the mid-roll, we do have a high reliance on the BJs. As for the archive videos, usually you -- the BJs can play the ads at any time. Let's say you, our BJ, has the show. You cannot add the mid-roll ads when the show is going great, at its highlights. So in that case, the BJs have the discretion to add and run the ads at any time. So you feel like, okay, this is about time that we get a break, and the [ attention ] is rather less. Then you can add, play the -- a mid-roll ad. That's what I mean by high reliance on the BJs. Now BJs also can use this depending on their situations. Now with the new solution, what we want to do is either preroll or the mid-roll. We want to bundle them up in one product to sell to the BJs and other advertisers. That means the BJs will have better discussions or more freedom to use such products.

Well, I have another personal question on the contents -- branded contents revenue that was pretty good last year. And I think -- well I'm in the -- I'm not in the game section myself, so I was wondering if the branded contents could be expanded to sections other than games.

That's a very good question. I know that we're strong in the esports game. And I think actually the potential for the ads growth, ads revenue growth, is larger in the nongame sections because we've already been very good. And I don't think we see much upside in this section that we're already very good at, but if you look at the nongame sections, the potential is very high, meaning at the same time that the competition is also very fierce. But as we are firmly putting ourselves as in the advertising sector, we do see a growth, quite a big growth, in the nongame section ads. So I think more branded contents will be placed for this section. Thank you very much.

Well, I'll answer your paying user. 4Q was 4.5%, and 2020 average was 4.2%. And these numbers is a 2 -- 0.2 percent point increase Q-o-Q. And also the PU increased by 0.5 percent point from 37%. So as you can see, we are accomplishing all the steps that we foresaw.

Next question is from Kyobo Securities, Kim Han Kyung. What's the -- this year's gift economy revenue outlook and the company-wide margin? Well, I think Ellen can answer this question.

Right. There was actually a person right before which was -- the KRW 4.3 billion loss in the other loss section under the nonoperating expense. Well, we have subsidiaries and companies that we invest, and the performance of these companies have already been reflected. To give you rough estimates: We have decided to sell off 3 Open Studios, and that will be about KRW 2 billion in loss. And for the PODTY, the audio service, that's about KRW 1 billion loss. And for the colosseum, it's also KRW 800 million loss. And there are some minor losses as well, but I wanted to give you at least a -- big chunks that were reflected in the nonoperating expense.

If you could scroll up a little bit. The question was on the guidance for the '22, '21. If I may answer this question: We've actually given a lot of thought into what to say about the guidance, but the 3Q and the 4Q of the 2020 were very good and our -- in terms of our performance. And looking at what happened in January, I think we have a good room for growth. So the top line revenue, we're looking at 20% growth. Now this is -- again is a target for the first quarter this year, but I think we are on a good track and a good track to achieve this. And for the operating revenue -- operating income, this -- last year was 20%. I'm talking about the operating income margin. And I think actually, this year, we're going to see a even higher number for this, but having said that, we always want to be careful with how much investment we want to make. So -- and you know that we are seeing an increasing changes in the space. So although -- we do see at least a target of 25% for the operating income margin, but we want to at least make sure that the minimum level is kept at 20%.

Very good time to buy the stock now.

Yes. We just talked about operating margin and I would like to add to that. I think I said something last year or so that AfreecaTV's margin has been set at 20%, and we have accomplished that. And if you just look at Q4's margin, it's not like we reduced our expenses. It's not a big problem in terms of expense control, and that means that we can always improve. We have the business structure that allows us to even improve our margin by controlling our expenses even further, but we don't want to do that so much more than necessary because we are doing so much well. That's not our top priority. Not just -- belt tightening is not our priority because we are confident that we can accomplish 20% margin. And what's more important is that timely investment, so that is something that we need to think about. And if we have that plan, then we're going to communicate with you in advance.

Well, yes, they gave us a lot of balloons, Star Balloons. So we have to do the reaction. Thank you very much. Thank you. Thank you. Yes, this question [Audio Gap] and that -- and setting up that design is this year's plan. [ So it is safe ] -- you can also receive sponsorship for certain products for commerce, and of course then, there will be enough incentive for your fans to buy that product on your channel, so we have to make sure that the users or the purchasers, the consumers will have enough incentives. And also, for the sellers, what are we going to do with them? For sellers, they can just sell their products on whatever platforms, but among those sellers have the certain needs for promotion. They are not going to -- I mean that is one of reasons why they buy -- they pay more to the platform, to become one of the power sellers. And we have to make sure that we have promotion tools with different amounts. And when we have the right design for the promotion tools, then definitely we can allure those sellers to our platform. That's one of the ways to expand our platform as commerce. So first of all, AfreecaTV mall needs to be designed and set up well. And then those products can be sold, and the whole flow and the pipeline needs to be [Audio Gap] to grow our volumes in [ that. And ] if that becomes -- when we reach that point, I'm sure we can increase the margins there. I think we have a lot of interest. And we talked a lot about the [ ads ] today; and I thought maybe I want to add something on the lives, on the ads. For the live ads, let's say -- or I need a bathroom break or maybe I need to prepare something, set up the stage, then we can release or we can place the ads there. When you listen to radio, it's basically there are breaks every time. You know what I'm talking about?

Right. So if we give that break time -- basically this is great for BJs, for us, to take a little break; and also good for the viewers, as they see more diversity instead of just listening to one BJ all the time as they hear more ads and interesting stuff.

Right. We've used this -- we introduced this for -- long ago, but I think we were off the -- off target in terms of the what will be the good products for the ads. So that means that the mid-roll ads were not on target for a long time. You talked about the upsides of the mid-roll ads, but unfortunately we weren't doing it right for the past few years. But if we do find the right products for the mid-roll ads, I think we can really see growth. Usually, BJs don't host a show over 1 or 2 hours, at least. Sometimes 4 hours [ actually is kind of ] average there. So during this long period of time, it's impossible to not have any break, so they can use this break time to run and place the ads in the form of the mid-roll ads. So I'm definitely going to make sure that we find the right products for the ads to increase the value of the mid-roll ads. Thank you very much.

It looks like we don't have any further questions, but we are taking your questions now, so feel free to ask any question on the chat room, in the chat box. So let me ask you another question. BJ, this noun, has become anyone who is broadcasting on the online platform, so outside AfreecaTV too. I think that also has impact on brand image. So for example, it can be a positive image or negative image. Even if anything happens with outside AfreecaTV, when the -- something bad -- when the BJ does something bad, that can have an impact on AfreecaTV's BJs and the platform too. So the BJ naming or to defend your image, do you have any strategy for that?

About 6 to 7 years ago, the BJ, the title, we thought about changing the name BJ [Audio Gap] to think about is there enough reason to change that when the BJ, the name, has been stuck with us. So we ended up not changing it at the time, but of course, what you're talking about is important because it's a big impact on our company because it's a brand value and our advertisement value too. But changing those names or titles is not so easy because the number of BJs on AfreecaTV is over [Audio Gap] Well, this is my first time today. And I'm very, very surprised pleasantly to see how this unfolds. As a BJ today, I've actually wanted to share my thoughts, ideas and questions that I've had. And again I myself am a BJ here on the platform. Well, actually, as I was speaking, there is a question here.

Yes, I look forward to getting more questions from you.

Now the next question is, what is this that -- you're doing the earnings report on the Q4. Is there any changes to the stakeholder return policy? Can you update on that, the dividend policy?

Well, for the -- I don't think we can give you any details per se for the dividend policy, but we have thought about that. We are a growing company and we also do the investment, but we feel, we know that we have to return to the stakeholders, so we're doing the -- pay out the dividend. Now we have to have certain criteria for dividend payout. So we're going to look at the growth. The net growth for the last 3 years and also free cash flow will be considered when coming up with the right amount of dividend, and that kind of policy will be continued for the next 2 to 3 years unless we have big changes. And that is why we came up with KRW 650 per share.