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Welcome to AfreecaTV Live Conference a.k.a. ALCON. So, this is our fourth broadcasting show and I would like to introduce myself. I am BJ, show host chair. It's great pleasure to meet all of you. Good morning. So, ALCON is open to anyone who is interested in AfreecaTV. However, please understand that due to the nature of ALCON, only those who signed up in events can ask questions via chat window. And we are almost at the end in the last day of October. And today, we are joined by 3 members; Mr. Jung Chan Yong, CEO of AfreecaTV and also Ellen, Kim Jiyeon, Head of IR; and Ms. Isla, Jun Kyunghee, IR Manager.
So, starting from Jung Chan Yong, nice to meet you all. So, the weather is very cold and now we have had the Chuseok holiday has passed and we are preparing for a good year next year. Today, we will take this opportunity to introduce the performance of the third quarter and also take a look at the outline of 2024 as a whole.
So whenever I see, I think you look very sleek and stylish. You came in beige. So, I hope we'll be able to have a good session today. And next is Ellen.
So, it is a great pleasure to meet you. So, as have been mentioned by [ Choco ], the weather is getting cold and now we are moving on to the winter season. So, I hope you stay in good health, and I hope you will be able to have a fun time today as well.
And let's say hello to Isla. Hi, Isla.
It is a great pleasure to meet you. I am Isla. And as have been mentioned, we are in the full season of autumn. I hope you would be able to bring or leave with a lot of insights for today's ALCON.
And by meeting you, I think autumn has dawned upon us and this is my last show. However, I would like to make sure that AfreecaTV continues to grow and that's why I have worn something in a pink or reddish color in support of AfreecaTV's stock prices. So, how should we go about it today? First, let me briefly go over the earnings highlights of Q3, 2023 before taking questions.
Okay, then now we will start the earnings call and Isla, please take it away.
Thank you. Let me brief you on the business performance and track record for the third quarter of 2023. In the third quarter, AfreecaTV continued to expand its content and upgraded services, strengthening its domestic business and taking steps in preparation for global expansion. First, in terms of major content in Q3, in the case of Asian Games from the end of September to October, about 2 million new accounts experienced AfreecaTV services. In particular, among the eSports adopted as official events of this year's Asian Games, the League of Legends final match reached the highest concurrent viewership of approximately 440,000 confirming the power of eSports.
In addition, the production of signature and original content increased by 38% quarter-over-quarter in Q3 and the cumulative live traffic increased by 234% Q-o-Q as well. Traffic of signature and original content varies depending on the category and specific content. However, in line with the interests of AfreecaTV communities, we saw the highest traffic in the gaming category and also high user interest in travel, sports, fishing and talk, camping broadcasting shows. Going forward, AfreecaTV will continue to work with BJs in collaboration to secure creative and high quality content IPs, unique to AfreecaTV alone to strengthen its competitiveness as a media platform.
Next, for service enhancement, we held an internal competition in introduction of the extension service. We successfully concluded the internal contest, then launched the extension program challenge on October 26, which is open to outside developers. The extension contest will continue until the end of the year. And thanks to the internal competition, we have secured many features that enhance the convenience of live podcasting such as [indiscernible], public sentiment reader, which find keywords entered by participants within a limited time screen helper displaying [ death ] match information at a glance, chat bot, preregistered FAQ answering tool and Lucky Draw board, a functionality offering gift elements such as Star Balloon and Ad Balloons. We expect to expand various credit programs that help live broadcasting and user participation through this extension program challenge.
There's no need to be a developer to participate. The content is open to all with great ideas in addition to extension, services for the second half of the year's development prior or the preparation of the global platform, SOOP. We believe Soup's readiness is one of the top priorities at AfreecaTV, highlighting its strong commitment to global expansion. We're focusing on company's capabilities by supplementing the detailed elements of business strategy as well as the platform service enhancement and development.
Now, we move on to the 3Q earnings. Sales in the third quarter came in at KRW 87.9 billion, up Q-o-Q, 1% and 7% Y-o-Y. Platform sales in the third quarter stood at KRW 64.9 billion, similar to the second quarter, minus 0.5% and increase of 12% Y-o-Y. Ad sales in the third quarter were KRW 21.6 billion, which was more disappointing than expected as the peak season effect was limited due to the continued downturn in the advertising market. In 3Q subsidiary, CTTD consolidation was incorporated, up 8% from the previous quarter, down minus 7% Y-o-Y. Platform advertising fell 9% Q-o-Q and minus 20% Y-o-Y. While content-based advertising sales fell 14% Q-o-Q and Y-o-Y minus 25%, with some major content production sales falling Q2. However, in the case of other ad sales, CTTD sales have been fully included starting this quarter, up 296% from previous quarter and 195% from the same period last year.
Now on to operating expenses. Could we please show the operating expenses slide? Now, on to operating expenses. Operating expenses in the third quarter were KRW 66 billion, up 5% from previous quarter and 8% from the same period last year. The main reason for the increase in cost compared to the previous quarter is the increased cost of investment such as CTTD connectivity and acquisition of Asian Games broadcast rights, activation of original and signature content production and expansion of server investment.
To break down costs. Commissions on ad were at KRW 7.3 billion, down 4% from the previous quarter and 47% from the same period last year. This is due to drop in ad sales. Another variable cost, paying charges were at KRW 9.7 billion, similar to the previous quarter's sales performance, but increased by 1% compared to the previous quarter and 25% compared to the same period last year, as the ONE store commission rate was slightly adjusted. As per fixed costs, employment costs were at KRW 20.1 billion, an increase of 4% Q-o-Q, 23% Y-o-Y, which is an increase due to an increased number of employees on the consolidated basis. There was an increase of 175 employees at CTTD.
Content production costs, which were related to content investment were at KRW 6.6 billion and original signature content production was active in the third quarter. But league production cost decreased in the second quarter, down 3% Q-o-Q and up 68% from the same period last year. Commission on broadcasting rights and others were KRW 6.8 billion, up 32% Q-o-Q and 4% up Y-o-Y, including some of the costs of broadcasting rights for the Asian Games in effect of incorporating CTTD. Due to the increase in cost due to server investments, tangible and intangible depreciation and amortizations were executed by KRW 5.1 billion, an increase of 7% Y-o-Y, 21% up Y-o-Y. Q3 operating profit came in at KRW 21.9 billion, down 7% Q-o-Q, up 6% Y-o-Y. Operating margin was 25%. In addition, net profit for Q3 was KRW 19.3 billion, down 15% Y-o-Y and up 13% Y-o-Y. Please refer to the annual statements of financial position.
Thank you very much for the presentation, Isla. I believe you may have some questions and if you have, so please leave them in the chat room, and I myself have a question.
So, as have been mentioned, Asian Games invited many new accounts as high as 2 million. So, I myself is one of the viewers as well, I'm not a new account myself, but I also did a relay broadcasting, but what was very good was, I was able to learn about the sports called wushu. However, by doing a broadcasting myself, it was so fun and it was very impressive as well. So, we have many new viewers and I think that would have been the sentiment shared by them as well. So, I would like to ask about the investment in copyrights as well or broadcasting rights.
So, in the case of the Asian Games, this was not intended. However, on online and mobile, we were almost the exclusive broadcasting, pushing up our traffic. And since you have done the broadcasting, I think that would be for the national competition. And in the case of Asian Games and other global big sports events, we try to purchase the copyright or broadcasting rights to improve the viewership. However, the copyright commissions in some case could be very expensive. And based on our business decision if this -- it could be opted out. However, up to this point for global big events, we were able to purchase the copyrights and continue to do so as well. So, many different copyright investment has been being done and next year, we will have the Paris Olympics.
We will be able to see it on AfreecaTV as well.
Yes.
And [indiscernible] gave 2 Ad Balloons. Thank you very much. And we have a question.
Hello. I am Oh Dong Hwan from Samsung Securities. We have seen an uptick in MUV, why is the reason for a downturn drop in paying user? Is there -- are there ways that you have planned to improve paying users?
And as for the paid users due to the in-app payments, there are many light users and they have a difficulty in entering the platform or the number is not so good. So, in order for the paid users to pick up, I think it's all about content. And also it could be about the bond with a BJ. So, it's based on interaction and good communication. So, with us having a more activated platform, I think the paid users will go up. So functionality-wise and content-wise, if the BJs are to have a strong bond and relationship with the users to enjoy themselves, I think it would go up. And as for extension services, it has been launched. And we also had a user competition in contest, as you know. And I think these are opportunities to sow seeds so that users would be able to together enjoy time and spend their time with BJs. So, we have many different softwares and functionalities to do so.
You talked about the launch of extension service. And is it a better service launch? Or is it in a launch in earnest?
I believe that we can start it in earnest. In order to promote the service, we will be offering gifts and other benefits for participants and users to take part. And also, we have the gift money of KRW 30 million being offered.
Okay. Moving on to the next question. Nice to meet you. I'm Yu Incheol from Citi Securities. So in the third Q, the Star Balloon Y-o-Y base effect was there. However, comparing to the previous quarter, the Y-o-Y growth rate has not been meeting expectations.
So, as you have mentioned, it has not met expectations comparing to the previous quarter. So, it is almost at the similar level of the previous quarter. So, overall transaction-wise, I think it would be an increase. However, starting from 5 to 6 years ago, the commission has been lowered and it's an ongoing process. So, 20%, 30%, 40% is not changed up to this level. However, we have been expanding to overall cut the commission. And I think this effect is shown. So, comparing to the previous quarter, maybe it's not meet expectations. However, it is above par or in the same level. So, if you look at the seasonality, the third Q is not so high and it would go lower in the fourth Q. So, I think the pattern has changed.
In the first and second quarter, it used to grow and then it goes down in the third quarter and the fourth quarter. However, this year, comparing to 1Q, 2Q was higher and it was in the similar level of the third quarter. So, it's not because of a critical issue. We have been looking into it and we have been analyzing the trend, but it's not a significant or serious issue that we think is critical. So, we are expecting to grow or the expectation is to have a Q-o-Q increase. However, we need to consider the pattern and the seasonality. And considering this, we are doing well.
And additionally, I would like to talk about some figures and numbers. So, at now the Star Balloon revenue share structure, as BJ and regular BJ, we have different kind of tiers, as you know. So, in the case of Best BJ and Partner BJs, we are increasing the number. So, now 30% of the active BJs are Best BJs and Partner BJs, tiers and Y-o-Y, the baby and puppy number is 600 up. So Q-o-Q, this is 17% increase. And comparing to the previous quarter, we have 160 more babies and puppies.
So, if you look at the Star Balloon transaction overall comparing to the previous quarter, we have a 3% increase and this is because or thanks to the increase of the baby and puppies. So, the take rate would be less for AfreecaTV as a whole. That's why the number is in the same range of the previous quarter. So, what I would like to tell you is quarter-over-quarter and Y-o-Y, the Star Balloon is going up. And the Google policy could be an obstacle or is an obstacle. Despite of that, the Star Balloon is on the rise.
You talked about baby puppy going up. I believe that UE can have our hopes up going forward.
And overall, in the industry, I believe it is a growing industry and a growing market and our overall sales are going up as well in this aspect. But the take rate would have been going down, but it means that we are giving more and more of that portion to our babies and Puppies.
We have -- the margin that we got was -- in the 30% range, and it has been dropped to the low-30% range. The number of Best BJs and Partner BJs have been small. However, that portion that number has been going up. In the past, we had more ratio of active BJs However, I believe that we will be keeping that margin at the take rate, early 30% from the company so that we will offer more part of that commission to our Best BJs and Partner BJs.
Thank you for the answer. And next question. So, despite the Asian Games, the MUV Q-o-Q trend was not meeting expectations and why was this?
So with the Chuseok holidays, traffic seems to be weak. And thanks to the Asian games, I think the traffic was above par.
And any other additional comments that you could add on.
So in the second quarter, there were many different kind of eSports league competition, pushing up the traffic in the previous quarter and this was deflated in the third quarter. And the eSports leagues and game broadcasting are receiving more traffic. So, when there are more traffic -- when there are more events, there are more traffic. And in the case of Asian Games from September to October, it has been held and most of the final matches were in October. The final match for [ LOL ] and also the same for soccer and baseball. The final matches were in October. So comparing to September, the traffic of October would be better.
And the Asian Games effect would be more in October.
And in the summertime, a lot of people go on off-line activities and they go on vacation. And I think the Chuseok holiday is the biggest factor behind this.
Now moving on to our next question. Can you please brief us on your plan for advertisement?
This year, it hasn't -- when it comes to advertising sales, it did not go as planned, which is a disappointment. For the 4Q, I believe that the market is going to be better. However, overall, in the advertisement market, we are seeing slowdown and which is affecting us as well. So annually, last year, I told you that our goal was KRW 100 billion. I believe it would be hard to hit that number. But I do believe that we'll be able to see the figures that we posted last year when it comes to ad sales. And we do have already secured ad -- large amount ad campaigns. And so that would be the wrap of this year. But next year, we will be launching a lot of meeting with a lot of big clients and it will be -- we'll see more good news for next year.
Thank you for the answer. Moving on to the next question from Hyok Joong from Daiwa Securities. So in the presentation, you mentioned about the global platform preparation. Can you elaborate on the preparation?
So globally, as you know, we have been working with Vietnam BTV to launch online services. So, I think it's not fully commercialized yet. We are in technical support to prepare for the service to be launched and thankfully, the P2P efficiency and service quality are areas that are improving. So, I think from the next quarter, online would also be able to prepare many professional contents as well. And for smooth servicing, a lot of preparation is going in. And our exclusive platform for Southeast Asia as have been introduced S-O-O-P, SOOP. New platform is also being prepared. So, everything is on track. However, the current AfreecaTV has a legacy system and we are trying to get away or move away from the legacy system. So, the basic would be able to be launched in the first half of next year. And additionally, we will be upgrading functionality with the following quarters of the third quarter and fourth quarter so that it will be completed within next year as a platform.
In the global platform, we'll first be targeting Asia to stream eSports gaming contents and basic camp would be in Thailand, Bangkok, Thailand. And in Bangkok, the base camp different kind of opportunities and business operations will be implemented and everything is on track. So, by the end of next year, Thailand will be the base camp and more details of the preparations will be visualized. And aside from this, globally Korea AfreecaTV has a Star Balloon business, but it took 8 to 9 years for this business model to stabilize. And comparing to back in the day, the donation or the live streaming services have been very active to the present moment.
However, the gift item sales takes time to stabilize and [ look ] down. So in the global platform, we will have a B2B functionalities embedded. So, we will start with the B2B functionalities as well. And as a matter of fact the drive behind the platform would be used by the participation or would not necessarily be a grassroot enjoying participation of users. We have a content driver of eSports or also a driver of businesses that we are planning as our goal for the global business. So partnership is important and global and also domestic company partnership would be critical. So business-wise, preparations are being made now.
SOOP will be starting in earnest first half of next year. And now moving on to our next question. So, the jump in server investment expense was -- it's carried out to support 1440p.
1440p investment, we believe that it's very significant. And our plan is to offer it selectively and offer it to certain BJs and started out that way and to expand it to overall service. So, the gradual jump from 720 to 1440 and to move beyond that, the investment cost -- investment expenditure that we have to carry out is very substantial, meaning that we have to do it gradually in a gradual manner. So -- and also for genre that requires such expansion is limited to certain starting with gaming, I believe. And recently, the investment expenses that we reported has been carried out to increase the obsolete servers and to improve quality of broadcast.
Thank you for the answer. [indiscernible] send us the Star Balloon, thank you very much for that. Thank you. Okay. Then starting from this year, I think major changes would be made to the BJ Awards. Can you care to share some details of the awards?
So, I'm not sure how much you are interested in the awards. However, the award is on internal venue of celebration and congratulations. And it is prepared to celebrate and congratulate and encourage all the BJs who have been very active within the year. That's why through an award ceremony, we will be supporting the BJs. And up to last year, only a certain number of BJs -- for instance, top 0.1% of BJs were invited to celebrate and participate in the awards. However, this year, this will change.
We will be making -- having a celebration with all of the BJs of AfreecaTV, and it will be held in a hybrid format online and off-line together. However, basically, the frame would be more focused on the virtual form. And offline venue at a certain period of time, we'll be inviting different kind of BJs and this would be minimized. The off-line presence would be minimized. So, we are trying to get more BJs more engaged. And among the individual broadcasting, the celebration or the ceremony award would be added on to that and expense or cost wise, we are not trying to do drastic cost saving by the hybrid awards. However, by transitioning from offline to online, some cost will be saved and this would be compensated to BJs as award money.
Thank you. I hope a lot of BJs participate in the awards. We haven't got any further questions so far.
However, that it's also a testament that we are going in the right direction or I believe that our stock prices are going down, reflecting that earnings miss. We haven't been able to live up to the expectations. And also another aspect of this is that we have seen questions -- a lot of questions when the stock price was up.
However, right now, we have another question. So, this is from Yu Incheol of Citi Securities. So, I would like to have a PO update of 3Q. And among the baby and puppies, you said the proportion is 30%, but what is the plan? How higher should it be? How higher should it be improved? And I would like to hear about the positive impacts with the increase.
And as I mentioned, it is 3% less. And in terms of ARPU, in the net proportion, it's 3% increased. And in terms of the gross level, it's 6% up. So, the overall transaction overall has been increased in the proportion of baby and puppies in the positive effects. So, the baby puppies are 30% compared to the active BJs.
So, active BJs are almost 30% in proportion?
Yes, almost 30%. So, the number of Best BJs and Partner BJs are approximately 4,000, and it's a little bit less than 30% as a matter of fact.
And the positive impact of the increase of Best Partners and Partner BJs.
So, let me correct. So 30% is a rough figure. So, the active BJ numbers are [ 1,300 -- 200 ] and among them, 4,000 are Best BJs and Partner BJs which is with the proportion, which makes the proportion of 29%. So up to Best BJs or in order to become Best BJs, regular BJs, if we look at the churn rate of regular BJs, they start broadcasting and within 1 month, they quit or a lot of the regular BJs quit. Because within 1 month, they only have one viewer and they get exhausted.
And the second churn rate factor is. So the time to get to the Best BJ in average takes how long?
There's a certain period. For instance, I'd say that it's 1 year. So, if regular BJs don't become Best BJs within one year, they end up quitting or exiting to become BJs. So, that's why we are trying to motivate regular best BJs and that's why we're increasing the best BJ proportion. So, we should not only look at the Best BJs and Partner BJs alone, but we need to think of the commission. So, we need to make sure that the 30% does not fall. And up to this point, we will be increasing the proportion of active BJs. And we are trying to participate and anticipate the signals in advance to minimize the churn rate as well.
Just to add on to that, even if you want to be baby or puppy, you need to hit certain requirements and also, there is a qualitative and quantitative aspect of it. You have to have a broadcasting hours of certain amount and you have to have contributed certain time to the platform that would make you have a necessary requirement prerequisite to become the Best BJs or Partner BJs and the stature means that they're very motivated and they're very committed to the platform in order to maintain their status, they have also to need to broadcast a certain number of hours and meet certain viewership numbers.
So, meaning that we have certain numbers of baby and puppy means there's a very stable source of growth for the platform. And as Choco has said, we need to give more favors to these highly active BJs, and they will be leading the passion that they're showing will spread and we'll see more positive benefits of that. And so that is currently our plan.
Thank you very much for the detailed answer. So, we have a question from Oh Dong Hwan from Samsung Securities. So, regarding the global platform businesses, there's concern over increased cost. So, the labor cost, marketing costs and also infrastructure costs of 2024, how do you forecast it? And I'm only referring to the global business.
So, we are doing global business as we speak and we are in the process of renewing our global business. So basically, infrastructure cost. If we have a new launch, if we have bigger traffic, the infrastructure cost will go up as well. So, infrastructure cost will be different from setting up a new global business. And since we are based on B2B businesses, for a global model, marketing cost will not be too high. So cost-wise, I think the most important would be linked to labor cost.
And as a matter of fact, next February, the global business overall cost of 2023 will be estimated and we will also be able to have a plan for 2024 with exact numbers. So at present or it's too early to share them with you. It is being drafted within different kind of departments. And in December, it will be entirely reviewed and fixed and confirmed. So, it is too early to tell you the exact numbers, but we will share it with you next February.
Hi, I'm Kang Seoko from Shinhan Securities. In 4Q, we have World Cup held in Korea and also G-Star being held at this largest scale. Do you expect a big jump in 4Q content add growth?
Yes, we do have high hopes. 4Q we'll see an increase in the marketing and advertising market. We do have secured certain ad campaigns are ready in 4Q. And especially the events that you have mentioned will be a big driver. As you know, the ad market, we have to have a hands on physical connection with the clients to acquire those accounts and campaigns. That's something that we're working on right now. And in fourth quarter, we will be -- we'll see some of the marketing expenses being recouped and also we'll see some big revenues in ads.
Thank you very much. To add on recently, if you look at the overall trend, the BTL ads are going up. And as for branded content or within branded content, the general live streamings or VODs are enjoying branded content in their eSports league ads and also BTL ads as well. So following from last year, BTL ads are on the rise and the advertising market itself is being transformed and bringing about a lot of changes. So, there are companies that could do BTL, but there are not so many. So, to that end, I think AfreecaTV has a competitive edge.
And as have been mentioned by Mr. Seoko Kang from Shinhan Securities, G-Star or World Cup or other eSport events and also big publishers, BTL ads demand is going up. Maybe it's because COVID-19 is over, but I think that is working in our favor. And next year as well, we are expecting more growth to come from that. So, AfreecaTV is ahead of the trend.
So, do you have any other comments that you would like to add on? Please go ahead.
So, I've been in this business for 10 years, a decade now with AfreecaTV. And the nature of AfreecaTV is a good connection, offering that platform, a community between the viewers and BJs. And industry-wide that is the nature of our business and the success in this industry also depends on the strong community. As for the prospect going forward, this platform business will grow. And I'm very confident of that. And so the -- at core, we have these community and community building functionality. I think that there is where our strength lies and it is something that we will be promoting as well. And adding on to that, we will be going global and next year will be the year that we start in earnest our global platform. And we will be doing our best to report to you better earnings in 4Q as well. In next February, we will be reporting our next year's plan. Thank you very much.
Thank you. And Ellen, any comments?
So as has been mentioned by Choco. So from our point of view, starting from last year, we have been preparing a lot for the domestic AfreecaTV platform individualization and UI/UX update as well and also extension service introduction as well has been bringing about many different changes to users and BJs and everyone who participates in our platform and it is being received very well. So qualitatively or quantitatively may be, it will not be so visible to the investors. However, in the long term, we will be -- it will be bearing fruit and contributing in terms of figures as well.
And on top of that, our global business and also new businesses as well starting from last year, we have been in preparation and good preparation. So internally, AfreecaTV, up to this point, have been showing great growth after launching service, but I believe we will be able to have another big leap. So, we are in a transition period now and I hope you would be able to show support in the growing transitional process.
As mentioned earlier, I fully agree with what has been said. And as an employee as someone who's at AfreecaTV, we have seen tremendous growth in the company, the community that we're building. And based on that as a foundation, we will be leaping forward and we'll be preparing for that giant leap. And as Choco said, I hope that you will be rooting for our growth in the future.
Thank you very much. And we also received another Star Balloon from [indiscernible]. Thank you very much for your generosity and I believe he or she is from [indiscernible] and it's a great pleasure to meet this user. So, over the last year, I have been doing earnings report for AfreecaTV and I did a lot of study and research myself. And I think AfreecaTV is so much more than I expected or so much more than I imagined. Scalability and the business prospects are so bright, and I'm very much looking forward to the future of AfreecaTV, and I will also participate actively as a BJ and also a viewer as well. So, I would like to thank you all for the last year.
So with this, we will conclude today's ALCON, and I would like to thank all the viewers and participants and we will come back with better news in next February. Thank you very much for your participation.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]