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

Welcome to AfreecaTV Live Conference aka ALCON. I'm BJ show host [ Cherry ]. Very nice to meet you. This is my first time being joined. It's great to be here, and I look forward to a great participation. Thank you for your welcome. Thank you for your warm welcome. 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. First off, could you say hello to those who joined us?

Hello, good morning. I'm Chan-Yong Jung, nickname [ Cho-Ko ]. So we'll be -- we are joined by BJ show host Cherry. And please look her up in the AfreecaTV and subscribe to her channel, that would be really nice because she is going to be the host for this year. Well, we're going to get into all the details later. But today, we're going to tell you what the plans we have and our outlook in the year 2023, and I look forward to a fruitful conversation today. We are ready, and we have all the exciting plans. So I'm very excited to share all of our plans today.

How about you, Ellen?

I am Kim Jiyeon Ellen. Yes, so the 2022 has passed, and now we are about to show you our business highlights in 2022. Well, there are some difficult situations in Korea and outside Korea, too, but we look forward to a bright future this year.

How about you manager?

Yes, great to see you, and I look forward to the fruitful conversation today.

So what's the order of business this morning?

So first, let me briefly go over the earnings highlights of Q4 and year 2022, then I'll take the questions.

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

Here, the business performance and earnings highlights of the Q4 and yearly -- Q4 2022. Amidst the continued sluggished economy last year, we witnessed positive changes in the AfreecaTV platform ecosystem due to changes in the competitive landscape of the industry that we belong to. In addition, during the fourth quarter, international sports events such as the World Cup, as well as the expansion of game categories were accompanied by rich contents, and we did our best to boost the platform more than ever. First off, led by the virtual BJs in the H2 2022, Minecraft, which has not been so active since 2016 has entered the top rankings in the casual game category. This is considered a significant change in terms of the overall boosting of the category and expansion of users in the long term. We are currently promoting the stable creation of the Minecraft community through various events such as official server support and [indiscernible]. We will continue supporting and expanding casual game contents that engage more BJs and users alike. During Q4, the live broadcast of the Qatar World Cup was effective in terms of traffic. During the World Cup, we held a variety of engaging events, such as match result prediction and South Korea's final result prediction and produced content that only AfreecaTV can do so well to provide something fun and entertaining to our users. As a result, the platform MUV rose by 10% Q-o-Q and the average number of new subscribers in the 30 days of the World Cup period also increased by approximately 22%, which we find very positive. However, sports content, such as the World Cup normally does not generate a lot of gifts. So it did not contribute to the increase in gifts. But it played a meaningful role in inviting new users to experience the community and ecosystem unique to AfreecaTV. Advertising business has continued to grow even in the fourth quarter. Platform ads have sustained its peak season effects and slightly increased Q-o-Q and branded contents also continued to grow in Q4, even though major eSports League season ended due to the increase in demand for off-line events such as G-Star and the addition of LCK franchise sponsorship. The growth in the situation where marketing spending of advertisers is being reduced due to economic slowdown is even more valuable and has a significant meaning, improving the competitiveness of AfreecaTV ad products. Furthermore, we aim to continue the sustained growth of the ad business through diversifying products and steady expansion this year as well. Considering these changes in the external environment and the growth of our industry, we have determined that 2023 is an opportune time, not only to make efforts for external growth, but also to prepare the platform upgrade for growth in the next 10 years. With this, we aim to, not only improve the streaming quality, but also provide an extended experience for all users. The foundation for this extension will be built through the introduction of personalization based on users' viewing patterns and the open API that allows external programs that can be directly integrated and utilized for the shows. This will be done throughout this year and will be synergized by expanding AfreecaTV's unique signature content. Additionally, we will pour all our efforts for global expansion while establishing a foundation for AfreecaTV's sustainable growth. Now earnings highlights for Q4 and year 2022. The total revenue of Q4 was KRW 79.9 billion, recording a 2% decline Q-o-Q and a 6% growth Y-o-Y. The platform revenue in the Q4 saw a 6% decrease Q-o-Q and 3% decrease Y-o-Y because during the World Cup, sports broadcasting had a sudden boost, limiting room for other more profitable contents, which eventually led to ARPU decline. Q4's ad revenue recorded KRW 24.7 billion, growing by 7% Q-on-Q and 39% Y-o-Y experiencing the advertising high season effect. Platform ad revenue has increased slightly by 2% Q-o-Q after passing its peak season, but it has grown by 39% Y-o-Y. Branded content revenue has grown by 1% Q-o-Q and 46% Y-o-Y due to increased demand for off-line events. Yearly revenue of 2022 was KRW 315 billion, up by 16% since last year. Ad revenue has achieved a remarkable growth of 50% Y-o-Y by gradually proving the advertising efficiency of AfreecaTV. And platform revenue has also continued to grow by 8% Y-o-Y despite a slow economy and issues related to Google in-app payments. In 2023, wholesale, AfreecaTV will continue to show annual growth in both platform and advertising. The operating profit of Q4 is KRW 15.5 billion, dropping by 25% Q-o-Q and by 37% Y-o-Y and the OPM came at 19.3%. This was due to the acquisition of the Qatar World Cup broadcasting rights and the one-off cost of BJ year-end awards ceremony. The operating profit for the entire year 2022 is KRW 82.4 billion, down by 7% from previous year with an OPM of 26.2%. It's largely due to the high-growth of advertising revenue and the content investment that picked up last year. The fourth quarter's net profit was KRW 3.1 billion, down by 82% Q-o-Q and down by 81% Y-o-Y, while annual net profit of 2022 was KRW 59.5 billion, dropping by 16% Y-o-Y. This is due to a one-off corporate tax expense of KRW 4.6 billion after a tax audit that was conducted in the second half of last year. More detailed operating expenses will be explained in the next slide. Now, turning to the operating expenses. The Q4 operating expenses recorded KRW 64.4 billion, which is a 5% increase Q-o-Q and a 27% hike Y-o-Y. This increase is driven largely by a one-off expense such as Qatar World Cup and the year-end BJ Awards ceremony, which add up to be about KRW 3 billion. This increase is though partially offset by a reduction in the labor cost. Other major Q-o-Q increases include server investment-related costs and BJ support. Advertising commission, which is available cost in nature, recorded KRW 15.5 billion and stronger ads revenue from both branded content and platform ads pushed up this quarter's advertising commission by 12% Q-o-Q and 5% Y-o-Y. As for the paying charge, the reduction in the platform revenue drove it down to KRW 7.1 billion, which is a reduction by 9% Q-o-Q. Employment cost, which is a fixed cost in nature posted KRW 13.9 billion, dropping by 15% Q-o-Q, but rising by 5% Y-o-Y. For other commissions, for broadcasting rights and others, it is heavily related to content investment activities. And due to Qatar World Cup broadcasting rights deal that we bought, this section was up by 32% Q-o-Q and 94% Y-o-Y. In addition, our BJs were very active around their content, including in the virtual category. So we spent more on BJ support category, which recorded KRW 1.8 billion, a jump by 52% Q-o-Q and 14% Y-o-Y. Lastly, on event expense. The year-end BJ Awards took place in full swing with the COVID effectively gone, and we spent KRW 1.3 billion for this 100% off-line event. This is an increase of 494% Q-o-Q and 8% Y-o-Y. For yearly operating expense for the year 2022 was KRW 232.6 billion, a 27% increase Y-o-Y. The hike in the yearly operating expense is largely fueled by increase in ad commission linked to strong ads revenue and growing labor costs. In addition, last year saw content investment picking up again, which pushed up the commission for broadcasting rights and other section, which in turn impacted the yearly operating expense. Looking more specifically only at the variable cost first, ads commission posted KRW 47 billion, a 73% hike Y-o-Y, mostly fueled by a strong growth in the overall ads revenue, including the branded content. Another variable cost is paying charge, which recorded around KRW 30 billion, and last year's platform revenue grew by 8%, pushing the paying charge up by 14% Y-o-Y. In addition, more investment was made on an original content, bringing content production cost section up by 17% Y-o-Y recording KRW 13.6 billion. Now, for fixed costs, employment costs posted KRW 63 billion, up by 24% Y-o-Y, mostly due to more hiring and wage hikes. For other commissions, for broadcasting rights and others, it recorded KRW 26.8 billion, 44% up Y-o-Y, mostly fueled by the purchase of the broadcasting rights and the salary hikes of the [indiscernible] team. Lastly, the depreciation and amortizing expenses recorded KRW 17 billion, up by 15% Y-o-Y due to server investment and the dedicated line use expense posted KRW 14.8 billion, up by 8% year-on-year. Lastly, the yearly financial statements, please do use them at your convenience. Thank you very much.

Thank you, Ms. Jun, for that briefing. As Ms. Jun just mentioned, if you look at the AfreecaTV, especially the game category, there is a strong growth in the Minecraft and the virtual BJs. What is your take on this?

I think that is a blessing for sure. And I see that [indiscernible] who is the diehard fan is now joining us at this chat room. And I think the increase in the virtual BJs is really taking up exponentially, and they are very, very powerful part of our AfreecaTV platform in terms of the time and the genre that they cover. And I said it was a blessing because when it comes to Minecraft, about 7 or 8 years ago, it was part of our major categories. And for many reasons here and there, we had very difficult time actually showing [ error in ] the Minecraft and it was almost impossible to watch it. But due to external environment, I guess, from last half -- later -- latter half of last year, it started to take off again. And now it's taking really an important part of our platform. And I think this is a great opportunity for us. And I think it's a blessing and we're very grateful for this opportunity presented to us. We're going to make sure that we don't lose this opportunity and make sure to make the most out of this.

Yes, you're right. It really will invite more teenage and those in their 20s to be part of our community. On my personal note, I'm a show host, as you know, and I'm mostly curious about the live commerce. I know there are various commerce platforms, and I've worked with them. And when I worked here at AfreecaTV, I think what really sets it apart is that, because there are so many BJs that we work with, and there's a loyalty of the diehard fans to those BJs and so I benefited from partnering with them. So Mr. Chan, what do you think is really the point that sets AfreecaTV apart when it comes to the commerce, especially? And also what is your plan for this year?

I think when it comes to live commerce market, there's a lot of live concerts and reservation and even suspicions on this category. And if you look deeper into it, when you look at the commerce itself more broadly, the margin isn't so high as you know. Having said that, I think when we look at commerce market, we do see some really amazing BJs and also the show host and the shopping [ malls ] that do exceptionally improving well on the live commerce. So I see the potential, but it's just a very few people, not that many. And as Cherry, you mentioned, AfreecaTV is different from all the other platforms for live commerce because we have a very strong community built upon the BJs. So when we have those kind of shows, we're not really looking at the business model for the commission cuts. What we want is using the IPs of the BJs for the products, the [ PV ] products. So that will be one thing that sets us apart from other platforms. Not only that, we are providing the consumers unique reasons to buy those stuff only at AfreecaTV and not anywhere else. We need to really give them the benefits. And I think the market is kind of like polarized because there's a lot -- people are into like free delivery, and the other is on the different payment methods that give them different benefits. But what we do at AfreecaTV, even for the same product, let's say, there's an ad balloon that we have. And there's ways that our consumers and users can buy stuff on our live commerce using the ad balloon. So that is what I mean by a benefit unique to our platform. So we are going to go in full swing for the live commerce this year as well. And I know this is a very important first step.

Yes, I myself as a show host, I was quite shocked because it was offered at a cheaper price than I had expected. And I see that there's an MOU that AfreecaTV signed with a small SME center. So yes, I look forward to your further expansion. As you said manager, the contents are being diversified and the signature content is something that BJs and partners can make. Is this only open for partner BJs?

Well, yes, signature contents entails some costs. So we have to be kind of cautious on proceeding with this content. So it really depends on the depth of the partnership and how well the BJ can perform on signature contents. These are some of the criteria. So it has to be prioritized because we have to be cautious about the resources. So best BJs and partner BJs are allowed to participate in signature content. And those BJs have to be very suitable for signature contents because without that, I don't think this program will work. So -- and each BJ is different. So there's got to be some needs from the BJ side, too. So -- and that's one of the things that we are doing to expand our platform as a content provider.

Yes, I'll work on it. Okay. First question. Hello. I am Hyok Joong from Daiwa Securities. Thank you very much for the opportunity to pose a question. So I understand that Twitch gave up its broadcasting right for the LCK Korean language. Now, how did that impact AfreecaTV in terms of the number of the viewers for the LCK?

It's not only meaningful. Let me tell you, Cherry, do you watch it? Do you play LoL?

Yes, I do. Yes, I do. I'm actually active on it.

So the opening match has actually doubled. So it's not just meaningful or significant. Do we actually triple? Yes, it's only for the opening match. I mean, for the official programs. Well, when I said double, I meant the number of shows of all our BJs on AfreecaTV. But if you look only at the official shows, that it's triple, but for the overall all BJ shows that it's double. So anyways, obviously, one big platform is gone here, and that's why we benefited from their exit. And for the right, we have a very strong partnership and it's getting even stronger as the time goes by. So not just the LCK broadcasting rights, but also many other cooperative arrangements are being made and have been in place to help our LoL players and the viewers. So we give a lot more fun for them to stay with us and enjoy better with us.

Let me read the next question is from Lee Hyunji from Eugene Investment and Securities. Recently, I see Minecraft is among the top rankings in the games category. And do you think this is a temporary thing, [ things to ] what is happening at Twitch? Or is this going to be a main game category of AfreecaTV?

Well, this is something that we kind of have to speculate. So I may be wrong, I may be right. But I think it has become and it will become one of the main game categories. Because if you look at who is leading this category and of course, there are main BJs that are participating in the category and the category is definitely growing. But if you see the leaders are virtual BJs. And virtual BJs on our platform have really settled down really well. So I think I can say with confidence that this Minecraft will be one of the major ones. I've been with AfreecaTV for more than 10 years now, and I see a trend. And I don't know if you remember last year, when we did the ALCON, we always talk about StarCraft or what do you think of the StarCraft boom? And of course, StarCraft or [ Mark ] or LoL whenever there's a boom on certain game category, that's a good thing for us. But if we only stick with one category, then it can be a little bit off-balance, so that can be something concerning. But Minecraft, I feel that it's now in trend and it's becoming one of the key categories. And of course, it's going to be part of the platform for a long time, but then you don't know how the trend is going to change, what kind of games will rise. So you don't know for sure. But if you see the category, there are so many different times and genres. But thankfully the long tail is quite effective and meaningful in the games categories. So even if the viewership is not so large in one category, there's a long tail. So that's quite positive. And will it depends on which title is gaining popularity among users and the BJ really determines which category -- which game title would be a major one.

Yes. Definitely, Twitch is being reduced. So I'm sure AfreecaTV can take effect from that. Yes, I think there's another question that just popped up. Yes, I think a lot of virtual BJs migrated to our platform. So those migration from the Twitch. How did that impact your indexes in the fourth quarter, especially?

Well, that's a number of active BJs or new BJs or the viewership are different parameters that we can look into. Of course, there was an impact, but I'm not sure if I have the exact numbers that I can share with you at this point.

Well, for new -- for tubers or virtual YouTubers. Well, let me tell you this way. Of course, it was the winter vacation. So that was the seasonality there. But those who are usually in the Minecraft, as you know. And so, in our indexes, in fact, the teenagers in overall are users, it's not major. But compared to the third quarter, the number -- the percentage of the teenagers, of course, went up, thanks to the virtual BJs. So that's a positive impact. But not only that, there's also other casual games, not just the Minecraft. I think there's a great opportunity that it can have an impact overall. So we want to leverage and take advantage of the opportunity. So that's why we are throwing out many events for the new BJs. And we want to make sure that we are going to use the open API systems for the possibilities for scale and expand for the BJs. So I think even within the game, we could probably maybe new targets or new categories or subcategories, and we're going to have more events to utilize this and more systems.

Yes, I see there's a lot of events and events coming after one another. So great to have so many events to keep us and invite us.

Yes, I mean, we see like -- it's not 2 digits, actually 3 digits, the new BJs coming in from Twitch actually. So this is definitely significant. And from the end of the fourth quarter, until now, if you look at the traffic, the mobile UV has never been lower than 1 million or 1 million mark. So I think we're seeing great impact and great results.

Thank you. Next question. This is Yu Incheol from Citi. First question is on PU trend. Second, Vietnamese surface launch time line and BM structure. And thirdly, a January Star Balloon and ad revenue trend. Can you elaborate on these?

Well, number 1 and 3, I think, Ellen, why don't you take over because I know I have to get your permission to speak? I'll take care of number 2?

Okay. So the paying user trend in December -- no, not December, the Q4, there wasn't any remarkable change. In terms of the gift economy revenue slightly decreased because of the low ARPU users declined a little bit. January Star Balloon and ad revenue trend, for January, thankfully there was a turnaround. And if you see monthly revenue compared to the previous months, there was a big pickup. So very grateful. In terms of the ad revenue, as you know, third and fourth quarters are our high season and the first and the second quarters are kind of a regular season, not a low season. And the eSports League revenue usually is recognized the end of February and March. So that is not reflected in January. The paying user and ARPU for January are on the rise. The ad revenue, we had a lot of partnerships with ad partners. And we work on these in the H1 and that -- the effect becomes visible in the H2.

In terms of the Vietnamese service launch, we are targeting at the first half of this year. And of course, we can kind of adjust the time line and launch a little bit early if we can discuss that with our partner. And [ MGNRS ], that's our BM structure, but then all the details have to be determined by internal discussion, and we kind of have to talk about how much we can disclose. But the overseas publishing model is something that we are benchmarking. Since this is a publishing model, we have our partnership, and we give them technical support and they do the service operation. So it's not like we carry a high risk. But at the same time, we really want to make sure that our Vietnamese service is provided safely and soundly. So that's our biggest priority because it's our very first step into the world. So we want to do it right. We have high expectation on our Vietnamese project and our partner is quite a large company also. So in terms of the content acquisition, they are in good hands. They really want to open it as soon as possible.

Yes, VTV -- you signed an MOU with VTV, Vietnamese public television. So how does that work? Our contents go through them? Or...

Well, we -- our priority is revitalization of the local contents. And of course, that includes any exchanges or our contents being broadcast there. But eSports or regular sports and social are also included in the deal.

Wow, our AfreecaTV is going to go global. That's nice. Next question. Hello. I am Shin Eun Jung from DB Financial Investment. First question. What are some of the new ad products for 2023? And second, for 2023, what do you think is the guidance for the platform ads and the content ads?

Okay. Ellen, do you want to take this?