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

Welcome to AfreecaTV Live Conference aka ALCON. I'm BJ Eun Sang, back again since the July ALCON. Hello, everybody. ALCON is open to anyone who's interested in AfreecaTV. However, please understand that since it's related to our earnings, only those who signed up in advance can ask a question via chat window. Today, we're joined by Mr. Jung Chan-Yong, our CEO; Ms. Kim Jiyeon, Head of IR; and Ms. Jun Kyunghee, IR Manager. Thank you very much for joining. First off, could you say hello to those joined us?

Well, I'm Chan-Yong Jung, the CEO of AfreecaTV and we're reaching towards the end of this year, and I'd just like to thank everybody who worked really hard. I mean my vision is already ahead to next year. Well, all the things that -- I mean, the rest of the quarter will be really about executing what we have planned. So today, we will be talking about some of the plans that we have and the strategies and I look forward to having our in-depth conversation with you all.

How about you Jiyeon?

Hello, I am Kim Jiyeon Head of IR. As you said, yes, we are almost reaching the end. Now we are living in the endemic and I feel that COVID-19 is going away slightly, I guess. So I look forward to many questions today. And we will get into the details of the performance Q3 and some of the situations that we're in, also our future plans for the rest of this year and next year, too.

How about you, Jun Kyunghee?

Yes, we're back in 3 months. It's great to be back, and we look forward to a constructive conversation today. So what's the order of business morning? Just how we've been doing. Let me briefly go over the earnings highlights of Q3 and then I will take the questions.

Okay, then. Let us move on to the earnings report. It's all yours, Ms. Chan.

Slide please Here are the business performance and earnings highlights of the Q3 2022. The third quarter saw many new developments and changes outside of AfreecaTV, Twitch announced their new policy of restricting the resolution quality for streaming service in Korea and Google started to implement their in-app payment policy. Inside AfreecaTV, the broadcasting time of partner and Best BJs, our expert BJs is picking up slowly, but surely. And even though not all traffic indicators have recovered, the MUV is showing signs of recovery. In response to Google's in app payment enforcement, we removed the Star balloon payment option. And accordingly, we provided an alternative payment page and sent out messenger notifications and store transfer events, to help users adapt to the new payment route. In the process, we saw some low-paying users leaving. However, our loyal paying users continue to make payments. So all in all, the impact on the total purchase was limited. Also, in response to the recent development among these streamers after Twitch's image quality degradation, we not only started actively recruiting the streamers, but also provided content production and technical support to help them settle down on our platform. Specifically, we are supporting the [Foreign Language], We Are The Idols, a virtual content, and we identified the pain points of the BJs that have migrated to us, and try to address them in real time. And when necessary, proactively respond to their needs by adding functions and signing MOUs with the related technology companies. New attempts were made on the content front. Not only did we help reduce the VOD original content [Foreign Language], which aired recently. We collaborated with BJ on AfreecaTV's live original content to produce content such as [Foreign Language] and Could Have Been Better, which were all well received by both BJs and users. As for our advertising business, we also have developed new products and our operating functions during the Q3, [ catch ] vertical video ad and mobile intro banner ad were added. And we have been actively engaged in sales activities to take in the demand for online and offline events such as G-STAR in the fourth quarter. AfreecaTV will always be at the forefront, quickly responding to the challenges ahead and the internal and external changes and striving to provide better services to users. Next up is the earnings report for the Q3 2022. The total revenue of Q3 was KRW 81.8 billion, recording 5% increase QoQ and 15% YoY. As for the platform revenue, after the change in Google's IAP policy, the Star balloon payment option was remote from Play Store, which led to a slight 1 point decline QoQ, but still 4% growth YoY. The advertisement revenue of Q3 recorded KRW 23.1 billion. Thanks to the high season and expanded demand from new advertisers, we saw a 26% growth QoQ and 60% YoY. Specifically, the platform advertising revenue went up by 30% QoQ and by 30% YoY, and the branded content revenue is also showing a remarkable growth, 31% QoQ and whopping 79% YoY. It can be said that our advertising business shows a relatively limited sensitivity to economic situation, and we're confident about its continuous growth potential, based on product enhancement and portfolio expansion. Now turning to the operating profit of this quarter. This is KRW 20.7 billion, dropping by 11% QoQ and by 11% YoY as well. The total revenue is showing a high growth at 15%, and as revenue has grown substantially by 60% YoY taking up 28% of the total revenue and this change in the revenue mix did impact our margin level. In addition, content investments also drove the costs up and the OPM therefore, for this Q3 recorded 25.2%. More details are shared in the next slide. Turning to the operating expenses; the Q3 operating expense recorded KRW 61.2 billion, which is a 12% increase QoQ and 28% hike YoY. Advertising commission, which is variable cost in nature, recorded KRW 13.8 billion, driven largely by the higher production cost, which is a result of the stronger revenue from branded contents, as well as platform ad. So the advertising commission for Q3 went up by 39% QoQ and 99% YoY. Also, increased original content production pushed up the overall content production costs up by 32%, recording KRW 3.9 billion, which is 14% growth YoY. For the paying charge, it recorded KRW 7.8 billion, our revenue in the gift economy section dropped, but we're experiencing users paying method the mix change with this paying charge grew by 3% QoQ and 13% YoY. Employment cost, which is a fixed cost in nature, posted KRW 16.4 billion only a very slight drop of 1%. And other commissions for broadcasting rights and others, this is heavily related to content investment activities, and we acquired East Asian Football Championship in July, along with others. So for Q3, this section recorded KRW 6.5 billion, up by 12% YoY. Last but not least, the BJ support category recorded KRW 1.2 billion, up by 26% QoQ, but down by 7% YoY. In the previous quarter, points for new BJs were taken off, but it was only a one-off event, and this is why we have that result. And for the other slides, please look into more details later for the financial statement. Thank you.

Thank you very much for that. So now let's take questions. I can see that a lot of fans have been made. We have KR. Thank you very much. Thank you very much for participating and also your new fans, [indiscernible]. Thank you very much, everyone. Thank you, everybody, for giving us the gift. I can see we have more people logged in today than before. Why is that? I wonder why? I guess, because it's an IR, only those that are involved heavily, such as the investors can write their comments on the chat. But I know there are others who are watching as well. Okay. Here, I have one. Thank you very much for being part of the fan club with us. Why don't I go ahead and ask a question? Well, the virtual BJs are quite a hot topic nowadays on AfreecaTV. What is your take on it?

Well, the virtual service in a broader sense was already mentioned last year at the ceremony. And this expanded concept of virtual service is already in our plan at AfreecaTV. But as of now, the virtual content is rather an impact or effect coming from those that migrated away from the other platforms into ours to certain developments. But for us to expand this further, we probably need to put more efforts for sure. But we would like to take this as a great momentum for the further expansion. Yes, I think a lot of new BJs are joining AfreecaTV from other platforms. You're right. On a business scale or from the service, right now, what we're seeing is a little bit different, because the -- our BJ is doing their virtual content for sure, and they have their own community or an association of a sort, and they're pretty active in that community. And. It's not the same as the original. The shows that we would think with people on their live because it's by nature virtual. But there is a difference between these 2 ways of what BJs can show to the audience, either through virtual, either the other way by the actual going live. So these 2 methods of being out there, really directly seeing and showing the audience versus seeing kind of behind the characters rather different like an avatar. So we are going to see what we can do with this. It will be great to have like a virtual free coupon -- a virtual gifting, that will be great too.

Right, we are actually looking very closely at it.

Okay. I think we have one balloon star, balloon, thank you very much. I don't see any questions coming in. What is going on? Well, the star balloon for the VOD. Thank you very much. Then I'll ask you a question. What was in the eyesight in the advertisement? [indiscernible], it looks so much fun. So the original content, I would love to hear more about the [Foreign Language] and the original content?

Well. If you look at those service, you know the reaction is quite positive and what happens with the original contents is that, the viewership will go on and it'll mature and that the content itself will become a more interesting and all the participants, basically the BJs. I mean I went there when they were producing it. At first, they don't know what exactly they're supposed to do, because they were more into live streaming, but then I could tell that they became more active and they -- and the participation also goes up. So you know, I mean it's going to be a long term thing, you know. So there's definitely the potential for more improvement. Did you see everything? I just saw the teaser, you know, the episode 1 and 2. Yes, I'm going to watch them today. The third episode is airing this -- tonight at 8:00 PM. So you have to catch up the first and the second one.

Alright, alright. So I'll take the first one. Yu Incheol from Citi Securities. It's about the PU in the Q3 and. Now what made that turn up and what are the Q4 paying user trend, you know, considering the World Cup coming up?

Yes, you know, the paying users of the Q3, as presented before is -- after Google in app purchases changed, there was a slight change. And that there was a 6.9% decline. The in terms of the traffic that Q2, Q3 was similar actually slight up. So the paying rate was 4.6%. And internally, we see that this -- the Google's in app purchase policy change -- and that led us to remove the option of the purchase. So this 6.9% decline itself is quite positive, you know, even though it's a decline, but still, and what made that turnaround? The paying users are on the right, definitely. And thanks to their loyalty and those high paying users. And they followed our direction, they followed our alternative route. So all in all, the -- it seems that we have no problem. And of course, in response to the Google policy, I mean, we've removed the option for paying -- getting the star balloons, and that was the strongest response. But I feel that, you know, we're doing really well, despite it all. But still there is the issue. So it's not going to be something that we can address in a short time, and we would definitely come up with ways to address it in the long term and be consistent with it. So in the Q4, we are going to not just look at the PU itself, but the traffic improvement. So with the traffic goes up, and we have other markets too, and other ways that we can reroute those users to come in. So we are going to drive up the paying users, so that's going to be our main focus. And of course this is related to the Google issue. But then we are definitely going to harness our loyal users.

Let me add to that. The existing paying users, declined slightly by 7%. This is QoQ. But this is actually -- we're doing really well despite the harsh situation, and those people who actually went to Google and after the update, Google Store and of course, they're going to be blocked to pay there, right to purchase that. So 60% of those people who were blocked, who actually went to other routes like ONE Store and Galaxy, and the rest of the 40% are low paying users, light users. Now these are the ones that we're going to look into the ways to harness them, keep them and for that content improvement strategy will be a long term strategy that we can get. But in a short term, through the mobile messengers we can send out alarms and you know giving them ways to give the route. And also we have a automatic recharging. So you know every month, if you pick just one day per month, then when the baseline star balloon amount, and when the number goes down, then it's going to be recharged. And also you can just set up the baseline basically. So every time the star balloons go down below the baseline then you can be recharged automatically. So we want to make sure that these people will be able to make purchases as easily as possible. And you know those, you know those people who are light users, we will definitely have some long term strategies.

So next question is the branded contents did very well compared to the overall situation. What drove this? And in the fourth quarter there are no new game titles. What is your forecast for -- for ads for Q4?

Yes for ads, just looking at about a year or 2 even long, 3 years ago, we've been very much focused on this, the ad business. And yes, over this time we've been growing pretty well and also. We've made prior investments for resources and many other areas as well. And. We are seeing the growing volume of our advertisers and we are also seeing new publishers or the new advertisers coming into our platform. So. It's clear that our ads business is very different from the original one, so we want to definitely expand this. I know that in the Q4, there are no new game titles being released, but we're not worried about it. We have enough to cover that lack of new titles. So I think for the fourth quarter as well, I believe we can continue our current trend.

Okay. Thank you very much. [ One EXE ] I believe is that name. Thank you for being part of our fan club. Thank you. And then we also have [indiscernible] joining us in the fan club. Now we have more questions coming up. [ Kwon Y. Thomas ] from Daiwa Securities. After the Twitch policy changed, what are the biggest 2 to 3 changes you see on AfreecaTV?

Well, Twitch as you know, we are in competition in the live streaming market, of course, but if you look at Twitch. They take up quite a -- they cover a market share, but the image quality is so important in streaming, as we all know. And in terms of the traffic, we can definitely see that the influence is there. What is related here is that, the BJs who want to improve their broadcasting and basically those streamers from the Twitch, who have migrated to AfreecaTV, and also there are some of other people who are in talks with us and they're preparing for the migration to AfreecaTV. So I'm sure that we'll be able to welcome those people in the queue for even more. So the number of active BJs and the viewing traffic will also have positive impact. And also there are some changes to our services. Twitch has their own service characteristics and we have our own traits, right, and that they have their situation and we have our own situation. And if anyone who has done broadcasting there or users in Twitch, and they come to us and they tell us about what's happening over there and their experience. And Kevin is really busy, because Kevin is at the forefront of user communication and he listens to the voices of the Twitch streamers and the users of the Twitch. And there are some takeaways, of course, and there are some things that we can address in the long term and short term. And the more BJs and the more users that we gain, that means that means we have to address some of their needs. So that's something that we're going to continue.

Well, yes, I saw that. One Twitch streamer came here and Kevin left a reply. And I thought it was really touching. I thought it was amazing. So you know, I saw a virtual streamer, so I thought that was amazing.

Okay, let's ask the next question. This is from [indiscernible]. The first question is how -- what's the number of the BJs from Twitch? Second question is, what are the incentives for you to attract more streamers from the Twitch? Do you have the number?

We do have it. So the BJ from the Twitch, so they are sometimes back here, but don't continue. So we are still in the process of getting this new people from Twitch. So I don't think we have that statistic yet. It's only in the thousands at this point. But as Mr. Chan just mentioned. I can give you some more details, for example the virtual BJs and there are also those who have experienced the functions, difficulties or -- well some other, you know difficulties in other platform and we know of those. So here when we have meetings, we know that BJ engagement is very important, communication is very important, and I think what really matters is that, meeting them in person really and get to know them and we will continue to do that. And especially for the BJ streamers, having a direct contact is of course one thing, but we can also add or address some of the technical difficulties that they had in the previous platform with Twitch. In fact they have to -- a lot of BJs have to buy certain programs, and what we can do is -- we can maybe have an MOU with the supplier and then make sure that our BJs can give these programs either cheaper or free of charge. So yes, we are going to look into this more. And I think in the fourth quarter, we could maybe give you more clear idea. Yes, in February next year, we can give you more specific ideas. And to answer to the second question, I know this is quite, quite a sensitive topic, but let me just go ahead and tell you the unbiased version. So incentives, there are 2 things. #1, usually and more broadly we would say that Twitch is a different user environment or BJs environment, and we will have to have like multi-faceted communication and support that's a broad way. And the second more specifically is that, Twitch has a partnership program as you know. And what we can do is, we'll find a better way to fine tune this kind of program partnership for these newcomers. We have different policies with Twitch, so we cannot copy and paste. But we will make sure to have similar ones that were attractive. And right now we have a tiered system for the best partner, new partner and et cetera, and some streamers from Twitch, we will have to give them some guarantees on the content and et cetera. But we will make sure that the we continue to have the balance with the current BJs and the new streamers. So the point is that, for those that require the BJ partnership, we will make sure to give them the benefits that they want, and that they need to prosper on our platform.

Next question. In terms of the advertisement with the mobile intro video ad and a short form catch video ad and next year, there will be ads attached to original videos too. How's your ad revenue prospect YoY next year?

Well, in terms of the advertisement business, you know I'm, I'm really pushing forward with this. We are on the rise, so just glad to see that and I take pride in it and you know I feel that I've contributed to the growth of the ad business. Like I said our main revenue stream is the star balloon revenue. But then on the long term, ads revenue has to come in -- as taking a significant, significant portion. With that there are many things that we can do, but then the star balloon revenue is so big, that I feel like our policies have been too limited. So the share rate 60%, 70%, you know I can't change those. If I change that, that's going to have a critical impact on our profitability. But in my heart, I want to improve the profitability of our BJs. You know, not 60 but 65%, you know, but I can't do that now. But if there's another big revenue stream and a business model, like advertisement and if I can get more revenue from that, then I'll be able to, you know, do things that I want to do with BJ profitability. So advertisement is something that I'll be very much aggressive about. And like you said on mobile, there is a intro banner and in the short form catch service has also ads and of course the original VODs, we will have the ad, but also PPL, once that's stabilized. And on top of that in terms of the platform ad, we're going to make a -- use the advertisement pages more efficiently. In global OTT, they have the ad supported package. So they are definitely becoming more aggressive. So our platform ads too, we have to make sure that the efficiency goes up and the diversifying and everything. But of course ads should not intervene with the content use and then we have to reduce that as much as possible -- I mean reduce the intervention of the ad. And we are getting quite a positive feedback. So I think after the end of this year, we'll be able to -- show us more about the advertisement. And I hope that such trend will continue next year. Well you tell me to -- you asked me about the prospect next year. We didn't really discuss this internally, but it has to go up you know above the KRW 100 billion, and once that goes above our target, then that's definitely -- it strengthens our platform.

I mean can I say? Is it okay? No, I totally understand because last month I saw game money twice from AfreecaTV and it wasn't a new game. So it was with an old game, and we did that promotion and that meant that you are quite aggressive with the ad of the games?

Yes, even if we don't get the direct revenue from the ads, but like you know, it would be great if we can influence -- have a positive impact on the revenue of the BJs. You know, that's something that I take pride in. Yes, yes, that's definitely incentivized me a lot.

Next question, let's take the next question and thank you everybody for star balloons. Oh, 100 star balloons. How generous! Thank you. Diehard fans, thank you very much everybody. Okay, let's take the question. From Shin Eun Jung, DB financial investment. What are your new ads product offerings for 4Q or next year? And do you believe that this upgrading of the ads function is going to have a direct impact to your OPM or the top line? And the third question is your update on the live commerce business?

Okay. So I think I can cover live commerce, what about you?

Okay, for the new product, I think for the ads Mr. Chan had already covered and we. I can I guess what I can tell you is about the ads function upgrade. As you know, in the -- we have the AAM solution that's an ads manager, and the CPM unit price went up, thanks to that and we're seeing a growing demand as well. And we don't have an agency in the middle and we sell directly to the advertisers, but that's higher profitability as well. And with the AAM solution, we're going to of course upgrade that, meaning we're going to narrow down with more detailed categorization. And on top of that, we are also seeing quite a substantial growth, like [indiscernible] said, branded content ads working with the BJs. Now for the branded content. We are working, we're doing it with our own staff. Now what we want to do is to upgrade the analysis or the reporting system. And with that, our advertisers will benefit, because they know already that the branded contents are effective and efficient. But when they see that in very systematic reports, they will be better convinced, which makes us have a stronger negotiating power for the price as well. I know, that the economy isn't doing very well, and a lot of advertisers will therefore prefer more efficient ways to sell their ads.

Okay. So thank you very much. Miss Shin Eun Jung, I believe was participating in the other event, I think. I remember her, she was beautiful. So I remember. All right. So for the ads, new product, actually I had a meeting with the ads department and there were 5 new offerings that they were briefing me on. Conceptually what I can tell you is that, right now the platform adds is the intro one, right before the video is on and the other is that in our UI if you look at it. There is on the main screen and there is the banners. Those are the main platform ads that we currently have. We have 3 services right by portion, the biggest one is the live streaming. And this is followed by broadcasting network, which means broadcasting. So by PUV I would say it's about. 70% so does that make sense? Let me tell you, 60% UV, 70% are with the so-called broadcasting. So that's quite a number, if you know what I mean. The so-called broadcasting section, we're not doing much on the ads area. So the point is, that our new ads products are going to really target those with high traffic. So we know where the traffic is, and there isn't any ads yet. So we're going to target these unchartered area. So new offerings for the ads will be coming up very soon, and for the function wise the ads function, this is all about efficiency. We need to make sure that we satisfy our advertisers, by showing them that this is very effective and efficient and this is definitely going to impact the price of our ad space as well. So that's going to give us definitely higher growth top line, as well as the margin of course. And for the last part of the question, which is the commerce business. We will be using a BJs IP for goods, like merchandises. I think when it comes to commerce business, it's important that it be connected with the advertising business, so next year. The BJs IP based merchandises will be released, and at the same time, more merchandises based on and centered around sellers will also be introduced, and the commerce will be combined with our advertising business. So you'll be able to see these new things next year.

Right. I saw some of those merchandises that was amazing. I saw the live commerce as well, and it was very, very amazing because it was very different and unique and it was at the same time, very entertaining, just like what AfreecaTV has always done.