Hybe Co Ltd

KRX:352820

Earnings Call Transcript 2023-Q3

[Unknown Executive]

Greetings. Thank you for joining us for HYBE's third quarter earnings call. This is [ Kim Sohjeong ], Head of the IR team. I'll be moderating today's call, which will proceed through consecutive interpretation. Today, our CEO is on an overseas business trip, so COO Kim Tae-ho will present business highlights for the third quarter and future plans. And CFO Lee Kyung-Jun will present the financial highlights, followed by the Q&A session.

Please be advised that today's earnings call is based on preliminary consolidated estimates under K-IFRS and thus, subject to change during an external audit.

Now I will hand over to COO Kim Tae-Ho.

[Tae-Ho Kim, executive]

Good morning. This is COO Kim Tae-Ho. It's been already 3 years since HYBE was listed on the stock exchange. As the first entertainment company to get listed on KOSE in October 2020, HYBE has consistently pursued both organic growth centered on a multi-label strategy and inorganic growth through M&As to diversify the artist portfolio and expand the genres beyond K-pop, which enabled the company to achieve sustained growth and innovation by changing the traditional dynamics of the entertainment industry where earnings were heavily dependent on the success of a few artists.

Furthermore, we have pursued convergence between music and technology and carried out diverse projects using artist IP to disrupt existing notions around the scope of the entertainment business and expand our business horizon continuously. As a result, HYBE has been enjoying rapid growth with the annual revenue growth of 49% for the past 3 years.

In September, we announced good news that all the members of BTS, a key driver of HYBE's growth and a core of HYBE's future, renewed their exclusive contracts with us to stay with HYBE and Big Hit Music. With this contract renewal, we are now able to prepare for a much anticipated comeback of BTS in 2025. Also, in 2025, we will carry out a special project to celebrate the 10th anniversary of the Most Beautiful Moment in Life, which is the most meaningful album for both BTS and the ARMY, so we ask for your interest.

This quarter again, BTS entertained their fans with diverse content. Released on July 15, BTS' official book titled Beyond The Story, which contained their stories for the past 10 years since debut, became the first book authored by Koreans to be ranked #1 on the New York Times' bestseller list. On the first day of release, the book was also ranked #1 on Amazon bestseller list in many countries, including the U.S., the U.K., Brazil, Australia and Japan. In addition, a documentary film titled BTS Monuments: Beyond The Star, a video edition of the book, will be released in December this year on Disney+. Like this, HYBE will continue to offer diverse content related to BTS for their fans, while BTS members are not able to appear as a group.

BTS members' individual activities are well underway. V released Layover in September, which sold 2.1 million copies in the first week, making him the first Korean solo artist with a first week sales of more than 2 million copies. This album ranked second on the Billboard 200, and all the tracks entered the Global Weekly Chart on Spotify.

Jungkook's digital single, Seven, stayed on the Hot 100 chart for 13 weeks in a row and his digital single, 3D, ranked #5 on Hot 100. On November 3, he will release his first solo regular album titled Golden, including the 2 single tracks that received much love from fans. For this album, Andrew Watt and Circuit, the producers of Seven, produced a lead song, Standing Next To You. And the other global musicians, such as Ed Sheeran and Shawn Mendes, participated in the album production, so we ask for your continued interest and support.

Enjoying explosive growth this year, Seventeen sold more than 11 million album copies from January to September this year according to the Circle Chart. And their 11th mini album, Seventeenth Heaven, released in October, saw the first week sales of more than 5.09 million copies, breaking the first week sales record of the K-pop industry. Before the album release, an off-line event called Seventeen Street was held to attract more than 100,000 visitors for 6 days and other off-line events, including Seventeen Café and department store pop-up event, were visited by a record number of fans. These results show that since the end of the pandemic, Seventeen fans have not only been consuming albums and concerts but also enjoying various artist content in diverse ways.

The group is also enjoying high album sales in Japan where their first Japan best album, Always Yours, released in August saw the accumulated shipments of 750,000 copies, awarding the group with the Golden Disc triple platinum certification. Starting in Tokyo in September, Seventeen will meet with a total of 500,000 fans during their Japan Dome Tour. And The City project, an urban-style concert play park will be carried out in 4 cities in Japan to offer diverse entertainment content for fans to enjoy. Four additional concerts will be held in Bangkok, Bulacan and Macao before concluding the overseas tour titled Follow that includes 18 concerts in 9 cities in January.

Tomorrow X Together has been active since early this year and their regular album released in October titled The Name Chapter: FREEFALL made the group a double-million seller. This new album entered the U.S. Billboard 200 at #3. So the 3 albums they released this year have all entered the Billboard 200. Their fandom in North America is growing rapidly, thanks to the collaborations with global artists such as Jonas Brothers and Anitta. In August, Tomorrow X Together became the first K-pop artists to be the headliner at Lollapalooza Chicago and wowed the audience with their perfect performance. And their presence in the North American market is expanding ever further. The group is also gaining popularity in Japan with a successful concert at Kyocera Dome held right after the release of their second Japanese regular album in July.

On October 31, BELIFT LAB became HYBE's wholly owned subsidiary, and their group ENHYPEN is continuing with diverse projects. After concluding the activities related to their fourth album, Dark Blood, in June, ENHYPEN conducted a world tour titled Fate starting in Seoul in July. And their third Japanese single, YOU, sold more than 500,000 copies in September, which brought the group with a Japanese Golden Disc double-platinum certification. Their first Dome tour was concluded successfully, and their first U.S. stadium concert was held in L.A. in October, and they met with a total of 85,000 fans in 6 cities in the U.S.

The group released a second OST track of HYBE's original story, Dark Moon, and held a special performance at the stage of the Dark Moon with ENHYPEN in Lotte World through collaboration with Lotte World Entertainment Park. Their fifth mini album, Orange Blood, will come out on November 17, so we ask for your continued support.

LE SSERAFIM's world tour, Flame Rises, that began in August, was successfully concluded with 11 concerts in 6 cities in Asia, including Tokyo, Hong Kong and Jakarta. On October 27, they released their first English-language digital single, Perfect Night, in collaboration with Overwatch 2, which is receiving much love from global fans.

NewJeans second mini album, Get Up, topped Billboard 200, and the group carried out diverse off-line activities in Korea and overseas, including the Lollapalooza stage and the Summer Sonic Festival. NewJeans released GODS, the official anthem of the League of Legends 2023, which is also gaining much attention from the gamers and music fans around the world.

&Team debuted less than a year ago but the Japanese local group of HYBE is making waves, topping major local charts such as the Oricon Chart and the Billboard Japan. Now &Team is going to come back with their first regular album on November 15.

Debuted in May this year, BOYNEXTDOOR released their first mini album, Why.., in September, which sold around 450,000 copies, 4x the sales of their debut single. And they entered the Billboard 200 chart, showing a solid growth trend. Following successful activities in Japan, BOYNEXTDOOR is engaging in Korea. BOYNEXTDOOR is engaging in various off-line projects, including the SUPERPOP concert in Japan, which shows their strength as a rising performance group. In addition, a new boy group from Pledis Entertainment will debut in the first quarter of next year. So we look forward to your continued interest.

Next, The Debut: Dream Academy, a joint project with Geffen Records of UMG started to release content in September, and the participants from diverse countries are currently taking on various missions. Fans are supporting contestants from their own countries or from similar cultural backgrounds as if they are cheering for athletes during the Olympics. For instance, votes for the first mission poured in from diverse countries around the world, with the most votes from the U.S. followed by the Philippines, Indonesia, India and Brazil.

The third mission round is well underway and the members of the new girl group will be revealed in the grand live finale stage on November 18. And their journey will be chronicled in a Netflix documentary series directed by Nadia Hallgren, a 4-time Emmy nominated director, known for the Netflix documentary, Becoming. This is the first project where the K-pop system is being applied in the U.S. pop market, and it demonstrates the methodology that we will continue to use to expand our geographies and genres.

Now let me update you on Weverse. In September, 13 artist teams of SM Entertainment opened their fan communities on Weverse, which has become an unrivaled global fandom live platform with 100 million downloads, 10 million MAU and 1 billion live streaming views. Also, Weverse was nominated as a candidate in Korea and Japan for the App of the Year award by Google Play. In October, Weverse and Weverse Shop were integrated to enhance user convenience. Now users can watch live sessions of artists in the fan community and purchase albums and official merch all on the same platform. We are diversifying business models, including the launch of Weverse by Fans, where fans can design and custom order official merchandise. And we're further advancing services to expand the fan experience.

The first thing to be published by HYBE IM is ASTRA: Knights of Veda, and there was a global beta test from October 9 until 17. As a [ built scholar ] game that can be played on both the PC and the mobile device, the game title has unique art styles continuing from the first title as well as a well-constructed storyline which is why global gamers are looking forward to this well-made classic.

While the beta test revealed only certain limited content, it was already highly regarded by the testers in terms of the development of the game IP, including interesting story lines, and the universe further developed from the previous game and new battle systems. HYBE IM and FLINT will actively cooperate and incorporate feedback from the global beta test users and thoroughly prepare for a successful official release.

We would like to thank the investors for their continued support, and we will continue to work hard to surprise the market with outstanding business results.

Now let me hand over to CFO Lee Kyung-Jun who will report on the earnings highlights.

[Kyung-Jun Lee, executive]

Good morning. This is CFO Lee Kyung-Jun. Let me report on HYBE's consolidated financial results for the third quarter of 2023.

The consolidated Q3 revenue posted KRW 537.9 billion, up 21% year-on-year. Revenue with direct artist involvement, including album sales, concerts, advertisements and appearances, was KRW 382.4 billion; while revenue with indirect artist involvement, including merchandise, licensing, content and fan club sales recorded KRW 155.4 billion. The revenue with direct artist involvement grew significantly year-over-year, thanks to the success of the albums by BTS V, Seventeen, NewJeans and Tomorrow X Together as well as the world tours by Seventeen, ENHYPEN and Le Sserafim.

Operating profit in Q3 posted KRW 72.7 billion, up 20% year-over-year, while the operating margin recorded 13.5%.

Let me give you more detail by revenue category. In the third quarter, of the direct artist involvement revenue, album sales recorded KRW 264.1 billion, up 104% year-over-year. The result is not only due to physical album sales but also thanks to the increase in music streaming revenue. Nowadays streaming is the most preferred method to listen to music, and the global music streaming market has been growing at an annual rate of 20% on average for the past 5 years. HYBE's streaming revenue from Q1 to Q3 this year grew 51% year-over-year as well. Of the streaming revenue, the domestic labels account for 52%; while BMLG, a country music label is 34%; and QC, a hiphop music label is 14%. The breakdown shows that HYBE has been adding genres through label acquisitions to diversify the music portfolio. In addition, The Debut: Dream Academy is a project for us to pursue organic growth, which will help us expand into the pop genres.

In Q3, concert sales recorded KRW 86.9 billion, up 84% year-on-year. Of the indirect involvement revenue, MD and licensing revenue showed a solid trend, posting KRW 85.7 billion and KRW 48.7 billion, respectively. In the third quarter, tour merch for Seventeen and ENHYPEN, including light sticks, as well as Beyond The Story, the BTS official book to celebrate the 10th anniversary of their debut, contributed to the quarterly revenue in this category.

Moving on to KPIs of Weverse, a global fan community platform. The average MAU in the third quarter is around 10.5 million, up 10% Q-on-Q. On top of the growth of the fandom of the existing artists, Korean and foreign artists, including SM Entertainment artists, have joined Weverse in the third quarter, boosting the MAU to surpass the 10-million mark. With continued service expansions and enhancements, MAU is expected to continue its growth trend. In particular, 13 teams of SM Entertainment are now on Weverse and their fan clubs on the platform are growing rapidly.

The ARPPU, which measures the average monthly revenue per paying user, recorded a slight decline Q-on-Q, but the total payments made on the platform grew 3% Q-on-Q, thanks to the increase in new users.

In 2024, we will be able to obtain tangible results from various businesses that we've been investing in for many years. More specifically, we look forward to seeing the fruits of our multi-label strategy, the musical diversity that we've been building, and our solutions business which spans platforms, games and AI, to provide fans with an unprecedented variety of entertainment. We will continue to do our best to make the rest of the year and the upcoming 2024 the beginning of a brilliant future for all of us. Thank you.

[Operator]

[Operator Instructions] The first question will be provided from Eric Cha from Goldman Sachs.

[Minuh Cha, analyst]

I'm Eric Cha from Goldman Sachs. I have two questions. First of all, when it comes to your album sales revenue, we expected that there will be a Q-o-Q decline in the physical album sales because of the schedules in album release. However, we saw that there was an increase in your album sales revenue quarter-over-quarter. So I'd like to know whether this is thanks to the increase in streaming revenue, which was able to offset the decline in the physical album sales. And I understand that HYBE wishes to make music more mainstream rather than just being recognized as K-pop, so in that sense, is it correct to understand that your streaming revenue portion will continue to increase? And to what extent the contribution of streaming revenue will increase in the future.

The second question is rather simple. I'd like to understand when Ithaca Holdings artists will resume their activities and what kind of schedules do you have in your plan? And I'd like to understand their contributions to your revenue and the operating profit going forward. And if you can give us some guidance, I would appreciate that.

[Kyung-Jun Lee, executive]

I'm CFO Lee Kyung-Jun. Let me address your question. First of all, we do not see any major decline in the trend of physical album sales. When you look at the albums released by our artists in the third quarter, their sales results were better than the sales results of the previous albums. And of course, overall, the growth rate in the physical album sales has been slowing. However, it is mainly due to a particular market where normalization is taking place. But in other markets around the world, album sales, especially physical album sales, are growing. So in the near term, we do not see any major decline in our physical album sales trend.

However, we do understand the importance of music streaming revenue, which was mentioned during the presentation, and the global streaming market is growing rapidly. Therefore, we are making various efforts to increase our share in the global music streaming market and we are carrying out various activities in the U.S. and we're trying to strengthen our negotiating power over distributors that offer streaming services.

Secondly, moving on to the artists of Ithaca Holdings. They were not really very active due to some of the personal reasons, but we expect that they will resume their activities next year.

[Operator]

The following question will be presented by Kim Dohyoung from CLSA.

[Do-hyoung Kim, analyst]

I'm Kim Dohyoung from CLSA. I have a couple of follow-up questions. When it comes to the share of music streaming revenue, I'd like to understand how much of a portion is currently being taken by the music streaming.

And secondly, I can see that your guidance that was provided at the end of last year and earlier this year was rather conservative but we see that there are a lot of activities planned for the fourth quarter as well. So we believe that your earnings results for the full year 2023 are going to be better than expected. However, moving on to next year, there are several BTS members that are going to join the military and the TXT performance may slightly go down, especially in terms of the Billboard chart. And Seventeen has been really successful. So because of the base effect, there may be some slowdown in their growth. So considering a potential slowdown in the growth of revenue coming from these major IPs, so what is your overall outlook for next year's performance?

[Kyung-Jun Lee, executive]

I'm CFO Lee Kyung-Jun. When it comes to the contribution of music streaming revenue in our total revenue, this is not something that we disclose to the market, so please understand. But when we look at the trends, in the medium to long term, the portion of music streaming revenue continues to grow. So we already have a substantial portion of revenue coming from the streaming sales. So that is how I can picture the overall situation.

Moving on to the second question, we already had some periods where BTS members were in the military. And next year, starting with BTS member Jin, he will return after June next year. So for all these periods, we already have a lot of content and entertainment content prepared in advance. So we would, of course, have to see how the market will react to these types of content, but we do not expect any major dip in the sales trend because of the absence of BTS members.

Moving on to Seventeen, of course, you mentioned that there may be some potential stagnation in the growth of Seventeen, but we do not believe so because the fandom of Seventeen is continuing to grow. And there are large-scale concerts and tours prepared next year for Seventeen in Japan. So we believe that there's a lot of growth potential for Seventeen still.

Moving on to Tomorrow X Together, we are carrying out and implementing various strategies according to the time slides in the growth trajectory of a boy band. So we do not see any major issues now.

And as for other HYBE acts, including NewJeans and LE SSERAFIM, we see a lot of growth potential still remaining in their careers. So we expect a lot from them. And there will be a new group that will debut next year, which we are also anticipating much.

[Tae-Ho Kim, executive]

I'm COO Kim Tae-Ho. Let me add some more additional comments. HYBE has a variety of capabilities that can translate the success of labels into other businesses. In other words, HYBE has been preparing and working on solutions business and platform and other services through which we can utilize the popularity of our acts and translate them into sales in other categories. So thanks to these capabilities, we believe we will be able to continue to generate good results. And this is a methodology or model that has been already proven with the success of BTS. And I believe that these will be able to offset any concerns in the market.

In addition, we acquired the entire stake of BELIFT, so it is now a wholly owned company of HYBE. In the past, the results of ENHYPEN were partially recognized, but now all the results of ENHYPEN will be fully recognized as part of HYBE's earnings. So this is going to contribute to further growth of our company.

As our CFO explained, Seventeen has been quite successful in Korea, Japan and China. So these were the main markets where Seventeen gained popularity. But this year, we were able to confirm that Seventeen has much potential and is expanding its fandom in other parts of the world. Therefore, there is much expectation from there. And ENHYPEN is also enjoying a continuous growth trend.

[Operator]

The following question will be presented by Park Seong Guk from Kyobo Securities.

[Seong Guk Park, analyst]

I'm Park Seong Guk from Kyobo Securities. I have 3 questions. First of all, your album sales results were much better than what the market had expected. And I do not see any major significant increase in your streaming revenue per se. So can we understand that this is thanks to the increased sales of albums in Japan where the unit cost is higher?

The second question is that while HYBE is doing really well, there is one particular concern in the market, which is about the declining trend of content sales revenue. So I'd like to get your input on the overall direction when it comes to your content business. Can we say that BTS documentary film to be released on Disney+ and The Debut: Dream Academy related Netflix documentary will bring about recovery in your content sales?

And the third question is, is there any update on the Weverse Membership Plus launch schedule?

[Kyung-Jun Lee, executive]

I'm CFO Lee Kyung-Jun. Let me first comment on the album sales trend. We recognize album sales according to the same standards each quarter. And there was a similar level of album sales in Japan quarter-over-quarter. So if there is any major discrepancy between our results and the market expectations, we will have to go back and study.

And as for the second one, content sales, of course, as you mentioned, there was a high portion of content sales from BTS. But for other artists and other acts, we are currently working on various initiatives to increase the sales of content related to artist IP. So we expect that there will be a recovery of content sales going forward.

And as for Weverse membership, as was mentioned during the presentation, we now have 13 acts from SM Entertainment on the Weverse platform. So it has become truly a K-pop fandom platform. And now we are executing a medium- to long-term road map to grow this Weverse platform as a global fandom platform and we're making various preparations. When it comes to the timing or specific timing of the launch of the Membership Plus, there is some change or some uncertainty regarding that. But I'd like to mention that we constantly develop and launch various services and features, which will later be packaged and offered as a membership product. So it means that we will continue to launch and offer new services and features, which will be tested and evaluated in the market. Therefore, even though there may be some delay in the launch of the membership, we are constantly preparing for better quality membership in the future.

[Operator]

The following question will be presented by Lee Sunhwa from KB Securities.

[Sunhwa Lee, analyst]

I'm Lee Sunhwa from KB Securities. I have three questions. First of all, you got the approval from the Trade Commission about the acquisition of BELIFT stake. So I'd like to know from when specifically BELIFT earnings will be consolidated and go towards HYBE's earnings. And I would like to know more about your operational strategies for BELIFT, whether you're going to continue to prepare for a new group debut. And when will be the comeback timing of ENHYPEN?

The second question has to do with Weverse. When it comes to the Weverse KPIs, the MAU trend is really good. And I'd like to understand the effect of SM Entertainment acts joining the Weverse platform. And you mentioned that Weverse is going to be a global fandom platform, so I'd like to know when Ithaca Holdings artists will join Weverse.

The third question is about potential bonus amounts because you're going to generate a very large earnings by the end of this year and I would like to know whether the bonus amount is going to be higher than expected to be recognized in the fourth quarter.

[Tae-Ho Kim, executive]

I'm COO Kim Tae-Ho. Let me comment on your question related to BELIFT LAB. We got the approval from the government on October 31. So the consolidation timing will be November 1. And as we now have BELIFT LAB as a wholly owned subsidiary, we expect that there will be more efficiency in the decision-making process. BELIFT LAB will start the year 2024 with 2 teams, ENHYPEN and I'LL-IT, which will debut soon. And we will continue to develop strategies going forward. As for ENHYPEN, they will make a comeback on November 17 with Orange Blood mini 5th album. And in 2024, they're going to carry out various projects in Japan, Korea and around the world to meet with fans. And there will also be various strategies, including the linkage with OST and tour projects for these teams.

[Kyung-Jun Lee, executive]

I'm CFO. Let me comment on your second question related to the KPIs of Weverse and the impact of SM Entertainment acts joining the platform. As we have now SM Entertainment artists on the platform, they are right now using various services and features offered by Weverse. So we believe that there will be a positive impact on our P&L for the year 2023, but please understand that we cannot share with you any specific numbers. And with SM Entertainment artists on Weverse, we not only have positive impact on our revenue and earnings, but also it has a benefit of expanding the user base so that we can continue to operate and run this platform in a stable manner.

And moving on to the timing of Ithaca Holdings artists joining Weverse, so we talked about this multiple times. So what I can say right now is that we have a medium- and long-term road map to expand Weverse and grow it as a global fandom platform. So currently, there are discussions underway with various artists, especially Ithaca Holdings. But we're not just limited to Ithaca Holdings' artists, but discussions are well underway with other major artists from other labels.

Lastly, with respect to our bonus and incentives, we have been recognizing them on a quarterly basis based on projected estimates. I do not exactly know what the market expectation is. But as of now, we have been recognizing these incentive payments on a quarterly basis on an accrual basis.

[Unknown Executive]

With this, we would like to conclude the third quarter earnings call of HYBE. Thank you so much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]