Good morning. Thank you for joining HYBE's Q2 earnings call. This is Kim Jinwoo, Director of Financial Strategy. I'll be moderating today's call, which will proceed through consecutive interpretation. Our CEO, Park Ji-won, will first present business highlights for Q2 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 KIFRS, and thus subject to change during an external audit. I will hand over to our CEO
[Foreign language]
Good morning, this is CEO Park Ji-won In the first half of 2023, we posted more than KRW 1 trillion of revenue, thanks to outstanding achievements of artists under HYBE Labels. Led by BTS members, who are successfully carrying out the second chapter of their career, marking the 10th anniversary of their debut, TOMORROW X TOGETHER and NewJeans had successful album releases in Q1, while in Q2, SEVENTEEN set the best album sales record in the K-pop history, and LE SSERAFIM, and HYBE, &TEAM, and BOYNEXTDOOR entertained their fans with new music. The total album sales in the first half of the year were 22.7 million copies, thereby already exceeding last year's total annual album sales of 22.2 million copies, demonstrating the power of HYBE artists once again.
The share of K-pop in the global streaming market is growing, and music by HYBE artists has been loved around the world. According to the Spotify Global Charts, the share of HYBE artists went up from 0.2% in 2018 to 2.8% in the first half of 2023, showing an explosive growth of global fans who love to listen to our music.
[Foreign language]
BTS recently celebrated its 10th anniversary of debut, and the members continue to carry on their solo projects to show their unique colors of music to their fans. After the release of D-DAY album in April, Suga held 25 solo concerts in 10 cities around the world to meet with 290,000 fans. Suga concluded the world tour with three encore concerts last week, entertaining BTS fans with happy experiences, who desired to see BTS at offline concerts after the Busan concert last year. Last month, Jungkook released a digital single titled, Seven, in collaboration with Andrew Watt, a globally renowned producer who worked with top-class artists such as Justin Bieber, Sam Smith, and Camila Cabello.
We were able to work with super producers like Andrew Watt and Jon Bellion through collaboration with Ithaca Holdings that became part of HYBE in Q2 of 2021. CEO Scooter Braun helped to get Latto to feature in the song, which boosted the album's success. These efforts made Jungkook become the second K-pop solo artist, following BTS Jimin, to top the Billboard Hot 100, that wowed the world once again. Currently, Seven is writing a new history of K-pop with its global success, including ranked number three on the UK Singles Chart, number one on Spotify Weekly Top Song for three consecutive weeks, and number one on Japan's Oricon Weekly Chart.
[Foreign language]
In June, BTS Festa was held to celebrate BTS's tenth anniversary and give back for all the love that we've received from the fans. The tenth anniversary digital single, Take Two, was released in advance before BTS members started to serve in the military. Along with the online event titled Bang Bang Con, more than 400,000 people watched the fireworks, and a large-scale offline event was carried out, where major landmarks in Seoul were decorated with purple lighting and outdoor advertisements, celebrating this very special anniversary with the Army around the world. In the second half of the year, J-Hope's physical album, titled Jack in the Box, V's solo album, Layover, and Jungkook's solo album are scheduled to be released, and we ask for your continued interest.
[Foreign language]
SEVENTEEN's 10th mini album, FML, sold 3.99 million copies on the first day of release, setting a new record in the K-pop history. The group sold more than 10 million copies in 7 months this year, which is an unprecedented achievement in the K-pop industry. Going into their 9th year since debut, SEVENTEEN's fandom is still growing significantly, which is leading to selling out and reprinting of older albums as the group is attracting much attention. SEVENTEEN started the Follow tour in Seoul in July and is going to continue their tour, world tour in Japan after releasing the Japan best album in August.
[Foreign language]
NewJeans topped the Billboard 200 with their 2nd mini album, Get Up, all three title songs in the album entered the Billboard Hot 100, showing an unprecedented growth and strength as the 1st year act. A lot has been achieved, not only in terms of their music, but also in terms of their advertisements. This new album has received much spotlight for collaborations with numerous global brands. In addition to the YouTube Shorts campaign of Super Shy, pop-up stores and large installations have been put in place around the world in collaboration with Spotify. The music video of ETA was filmed with iPhone, which has been used as part of the global brand advertising of Apple in many countries, including the U.S.
These types of collaboration with global partners help introduce NewJeans and their music to people around the world, and on top of that, communication and participation of fans help grow the global fandom of the group.
[Foreign language]
The Powerpuff Girls-themed album jacket and the music video title, titled NewJeans, have also been viral. NewJeans has been coming up with diverse concepts and unique music while collaborating with various brands and legacy IP, thereby going beyond just being a girl group to becoming recognized as a unique brand armed with original charm and unique color. There is so much more to expect from this new icon of K-pop, and I hope you will continue to stay interested in the group's next steps.
[Foreign language]
LE SSERAFIM's first regular album, UNFORGIVEN, released in May, sold 1.26 million copies in the first week, 2 times more than their previous album, ANTIFRAGILE, and achieving success in Korea and overseas. Along with the album release, a pop-up store was set up to reflect the group's identity into fashion items, which demonstrated much potential to expand the act into a fashion lifestyle brand using the artist IP. The group is also doing very well in Japan. The Japanese edition of FEARLESS, released in January, has been a big success, and the track title Jewelry was pre-released, which was created in collaboration with the globally popular musician, imase. Their second Japanese single, UNFORGIVEN, that includes that track, will be officially released on August 23rd.
Furthermore, LE SSERAFIM's first world tour will begin in Seoul on the twelfth, to be followed by 12 concerts in seven cities in Japan, Hong Kong, Indonesia and Thailand. Fans will be treated with LE SSERAFIM's powerful performances and fantastic stages as the group continues to carry out their global activities.
[Foreign language]
I would like to talk about the concerts by HYBE artists that have been taking place actively since Q2. TXT successfully concluded 27 concerts in 15 cities, with the number of fans attending the concerts more than doubled from last year. Suga of BTS also showed the power of BTS by selling out all 28 concerts in 10 cities. In addition, the Weverse Con was held in June for the first time in a festival format, where a lineup of 14 teams performed for 2 days. It is worth mentioning that the Weverse Con showed a potential for expansion, as it included 6 non-HYBE artists. In the second half of the year, much anticipated world tours by SEVENTEEN, ENHYPEN, and LE SSERAFIM are scheduled to take place, so fans are looking forward to them.
[Foreign language]
The concert-related success by HYBE artists is clearly shown in numbers. In 2022, four groups, namely BTS, SEVENTEEN, TOMORROW X TOGETHER, and ENHYPEN, held 59 concerts. In 2023, the number of concerts by seven groups is going to be 111, according to the announced plans. Concerts are accompanied by additional services, such as online streaming and merch sales, and concerts serve as an opportunity to further unite the fans and expand the fandom.
Please stay tuned, as HYBE artists will continue to offer diverse offline concerts.
[Foreign language]
Much has happened with HYBE America in the first half of the year. First of all, QC Media Holdings, that we acquired in March, started to contribute to consolidated earnings from Q2. QC's artists are influential in the U.S. hip-hop scene, constantly generating streaming revenue. Lil Baby's tour, that started in July, has been attracting much attention. In June, SB Projects signed a management contract with Ozuna, one of the musicians that represent the Latin music scene, followed by another signing with rapper Kali in July. Like this, HYBE has been expanding the genre and artist pipeline in the U.S. as well. On track is a girl group project with Geffen Records, a label under UMG, which is an initiative to apply HYBE's production system to the U.S. and a global market.
A new girl group will debut in Q3 through a completely new process and format. It is a new attempt to apply the production system of K-pop to a different genre in a mainstream music market, such as the U.S. We look forward to your interest and support as this is our first step in achieving the company's medium to long-term vision.
[Foreign language]
Let me now update you on Weverse. In the first half of the year, Weverse launched Jelly, the official payment method on the platform. Weverse DM, a subscription-based private chat service for fans to exchange messages with artists. Fan Letter, a service that allows fans to write and decorate messages to their artists, and Collection, which enables fans to record and document their fan activities.
In addition, the Weverse Con Festival offered Weverse Pick-up for the convenience of merch purchase, as well as Weverse Queue to allow fans to reserve their turns without having to wait in line, which represents another example of innovation by expanding the platform experience to offline experience. Weverse continues to achieve new records with 100 million cumulative downloads in June and 10 million monthly active visitors as of the end of July. The 10 million MAU mark is significant, as it shows that there is a growing number of fans around the world who are using Weverse as a daily platform to enjoy their fan life.
[Foreign language]
I would like to share with you Weverse's new plans and services for the second half of the year.
First of all, 13 SM Entertainment artists will join the Weverse community to connect with their fans, open Weverse Shop for online commerce, and launch official artist memberships simultaneously. They are WayV, Super Junior, SHINee, Red Velvet, NCT DREAM, NCT 127, EXO, BoA, aespa, Girls' Generation, TVXQ!, Kangta, and RIIZE, SM's new act. We expect that Weverse will expand its influence in the global market and strengthen its status as a fandom life platform through collaboration with SM Entertainment.
[Foreign language]
Weverse by Fans is a service that allows fans to design and custom order official merch, which was offered during the Weverse Con Festival for fans to experience. It will start global shipping service next month in September.
Furthermore, we are planning to continue to advance and improve Weverse services, including improving the quality of language translation on the platform and adding more languages for the app, so that global fans can use Weverse without language barriers. Also, efforts are on the way to improve the usability and service quality of Weverse Shop. We're preparing to integrate Weverse and Weverse Shop to offer seamless experiences for fans to stay on the platform and purchase artist albums and official merch. We are striving to enhance customer satisfaction, including ongoing discussions with various overseas local delivery companies to improve global shipping service quality.
[Foreign language]
The launch of Membership Plus has been rescheduled to next year in order to further improve the quality and ensure a high level of customer satisfaction....
The second half of the year for Weverse will be dedicated to raising convenience of the existing services, strengthening the fundamentals of the Weverse platform by ensuring successful utilization of newly added services, and conducting R&D to further improve the quality of Membership Plus to be launched next year. Weverse is expected to see profitability improvement through new service launches, service enhancements, and participation of global artists on the platform within this year, including 13 SM Entertainment artists joining the platform in September.
[Foreign lanuage]
HYBE published its first sustainability management report in July. Our vision for sustainability management is for sustainable entertainment, and we presented specific objectives of thinking forward for fans' lifestyle, creating possibilities with it, with the community, and leading industries by the standard. The Sustainability Management Committee has been established under the board, and a related support organization has been created.
HYBE will continue to practice sustainability management as a leader in the entertainment industry, and announce sustainability management-related information in a transparent manner.
[Foreign language]
We were able to produce good results, thanks to the passion of artists and employees, as well as fans' love and support. We would also like to thank the investors for their continued support and encouragement. We will continue to work hard to surprise the market with outstanding business results. Now, I would like to hand over to CFO Lee Kyung Jun, who will re port on the earnings highlights.
[Foreign language]
Good morning, this is CFO Lee Kyung Jun. Let me report on HYBE's consolidated financial results for Q2 of 2023. The consolidated Q2 revenue posted KRW 621 billion, up 21% year-on-year, which is another quarterly revenue record.
Revenue with direct artist involvement, including album sales, concerts, advertisements, and appearances, was KRW 436.4 billion, accounting for about 70% of the total revenue. While revenue with indirect artist involvement, including merchandise, licensing, content, and fan club sales, made up the remaining 30%, recording KRW 184.5 billion. In Q2, we not only saw high sales of new albums, but also growing demand for older albums, demonstrating the sustained growth of the fan base of HYBE artists.
[Foreign language]
Operating profit in Q2 posted KRW 81.3 billion, down slightly YOY, and OP margin recorded 13.1%. The slight drop in profit, despite the record high revenue, is mainly due to one-off expenses incurred in Q2. First, expenses related to BTS Festa to celebrate their tenth anniversary were recognized in Q2.
The company decided that the event would be significant for BTS and their fandom, who have helped HYBE become what it is today, as it would be an opportunity to express gratitude to the ARMY. In addition, substantial investment was made for the Weverse Con Festival to offer diverse experiences to our fans. These expenses led to a slight deficit in the process, but we, we expect that more artists and fans will join us next year, which will lead to improved profitability. Our adjusted EBITDA in Q2 posted KRW 106.4 billion, with 17.1% margin, showing stable cash generating capability.
[Foreign language]
Let me give you more detail by revenue category. In Q2 of the direct artist involvement revenue, album sales and concert sales recorded KRW 245.9 billion and KRW 157.5 billion, respectively, up 17% and 85%, respectively, YOY. The album sales by HYBE artists in the first half of the year increased two-fold YOY to 22.7 million copies. Suga of BTS and TOMORROW X TOGETHER had very successful tours in the U.S. and in Asia, and SEVENTEEN held a successful fan meeting in Japan, with so many fans showing up for the occasion.
[Foreign language]
Of the indirect involvement revenue, MD and licensing revenue showed a solid trend, recording KRW 111.9 billion and KRW 50.8 billion, respectively. In Q2, the quarterly revenue in this category was contributed by the tour-related merchandise for Suga, SEVENTEEN, and TXT, including Light Sticks, Suga's documentary film broadcast on Disney+, and BTS Island: In the SEOM.
[Foreign language]
Moving on to KPIs of Weverse, a global fan community platform. The average MAU in Q2 was around 9.6 million, up 3% Q on Q. On a monthly basis, the number of fans visiting the platform has been constantly on the rise, reaching the 10 million MAU mark in July for the first time since launch. As SM artists and other Korean and global artists are scheduled to join Weverse in Q3, the MAU growth trend is expected to remain solid. The ARPPU, which measures the average monthly revenue per paying user, recorded a high growth of 17% Q- on- Q.
[Foreign language]
The first half of this year was a period where we showed outstanding results by diverse artists under the multi-label system of HYBE. On top of solo activities by BTS, Jimin and Suga, SEVENTEEN, TOMORROW X TOGETHER, LE SSERAFIM, and NewJeans demonstrated significant growth with their new albums that have exceeded their previous album success. In the second half of the year, our artists will continue to wow the world with new music and meet with fans at even larger scale concerts. In addition to BOYNEXTDOOR, who debuted in May, we are all well on track to support new acts that will debut in the second half of the year and next year in Korea, the U.S., and Japan, which means that we will have even a more diverse lineup of artists under HYBE Labels.
Starting with Quality Control Music that became part of HYBE early this year, we will strive to boost our influence in the global music industry through expansion in terms of geography and genre. We would like to ask for your continued interest and support. Thank you.
[Foreign language]
Q&A session will begin. Please press star three, that is star and three, if you have any questions. Questions will be taken according to the order you have pressed the number star three. For cancellation, please press star four. That is star and four on your phone.
[Foreign language]
The first question will be provided by Sanford Bernstein. Please go ahead.
[Foreign language]
Sanford Bernstein, thank you for this opportunity to ask you a question. First question is a follow-up on the CFO's explanation on the decline in the margin.
I'd like to understand the overall direction for investment, whether you will continue to focus on making large size investments to grow the pie and grow the top line, or rather, are you going to turn to focusing on improving the margin and profitability in the second half of this year? The second question goes to CEO. Since last year, your stock price has more than almost doubled, and there's pressure on the valuation. For those investors who are holding the stock for three to five years in the long term, they would like to know when profitability will turn around and start to be improving. Overall, can you share with us your view on how you're going to manage the company to improve the profitability? Thank you.
[Foreign language]
I am CFO. Let me address your two questions combined.
You mentioned that our profitability has been on the decline, but when you look at the quarter-over-quarter margin trend, it has been improving overall. And what we have been communicating consistently since last year is that most of our investments are related to sales and administration costs. Therefore, there was some negative impact on the margin last year. However, such investments are now producing tangible business results starting from this year. Therefore, the margin has been improving. You asked the question whether we're going to continue to focus on making investments or focusing on improving the margin. I'd like to mention that when it comes to investments for new businesses, they may have a negative impact on the margin, but investments for the existing businesses will lead to better margin and profitability.
Investments for the new business have already been made substantially. Our investments going forward are focusing on improving the profitability and the business of the existing businesses. Therefore, we expect that the profitability will continue to improve.
[Foreign language]
I'm CEO Park Ji-won. We have already made significant investment and effort in terms of expanding of the vertical integration last year. Because we have a more number of teams and businesses, we cannot cover all the vertical functions ourselves, and that is why we are entrusting partners with some of the functions, and that is why there has been some shift. However, with the right mix of these two, we believe that the profitability will continue to improve. Regarding the operation, the global music industry is shifting very rapidly, and in order to continue to increase our influence in terms of music and label business and management functions, we will have to continue to make investments, and soon we will be able to share with investors our investment plans going forward. Thank you.
[Foreign language]
[Foreign language]
The following question will be presented by Lee Soo Ji from Merrill Lynch. Please go ahead.
[Foreign language]
I am Lee Soo Ji from Merrill Lynch. Thank you for this opportunity to ask you a question.
My question is similar to the previous questions because it is related to your, the management's long-term view on the market and the industry. It's already been 10 years since BTS debuted, and it has become a global act for the past five years. Not only HYBE artists, but also there are many K-pop artists that are doing really well globally. So some are wondering how long this will continue, and there are some concerns that this explosive growth may die down in a couple of years going down the road. Therefore, my question is, what is your view about the total addressable market for K-pop in the global music industry, whether it is recording or concert or streaming?
What is your view on the TAM, and how much is our share for HYBE, and how much upside do you think there will be in this industry going forward? In other words, I'd like to get some color from your side about the conviction or the view of the medium to long-term growth potential of the K-pop and HYBE music in this business, in the global market.
[Foreign language]
If you define a K-pop as a particular music genre, then currently the share of K-pop in the global music industry is about 2%, and we're not sure how much further it's going to grow. It may have some room for growth to, let's say, 3%-4% compared to other genres. In our understanding and definition, K-pop is not just a fixed genre of music, but it is more about the K-pop business system that can continue to expand. For instance, Jungkook released album Seven, and how can you classify this? Is it a K-pop or just a pop? The boundary between the two is becoming blurred. Going forward, in our future, we will not just stay as a fixed notion of K-pop, but rather continue to expand our K-pop business system to apply it to other genres.
we do not confine ourselves to just the typical or traditional notion of K-pop, but rather have a lot of expansion potential.
[Foreign language]
The following question will be presented by Kim Junhyun from HSBC. Please go ahead.
[Foreign language]
I am Kim Junhyun from HSBC. I'd like to ask two questions. The first question is related to Weverse. The MAU is growing well, this is good news. When it comes to the number of paying users, this is not really growing as fast as MAU. When it comes to the transforming of MAU to a paying users, what is the strategy that you're going to implement? The second question is related to your label expansion. You've acquired Ithaca Holdings and QC, these labels have helped expand your network, they don't seem to have a direct impact on your financials, rather have brought about indirect benefits. I wonder if you're going to continue down this trend. Are you interested in continuing to acquire independent labels going forward?
[Foreign language]
Thank you for a very good question.
When it comes to our strategy to increase the number of paying users, as was mentioned during the presentation, we have been continuing to introduce new digital platform services, including Weverse DM and the Weverse Fan Letter, where fans can decorate and deliver their messages, as well as Weverse by Fans, which will be introduced in September. We will continue to increase the number of new services so that we can induce an increasing number of paying users. Ultimately, it's going to be transformed into the membership program. It has been delayed because we believe that it is important to stabilize the new services first of all, and to improve the overall platform services before turning them into the membership program.
[Foreign language]
When it comes to Ithaca Holdings, as we mentioned during the presentation, there have been a lot of synergies and indirect benefits.
At the time of the acquisition, we had a strong conviction that Ithaca Holdings would bring about a positive impact on our PNL. Since until this year, the two main artists of Ithaca Holdings, Justin Bieber and Ariana Grande, have not been very active. That is why there was not much of a strong impact from Ithaca Holdings on our financial statements. Starting from the second half of this year and going on to next year, the two artists will start actively perform and do their activities. Therefore, we expect positive impact from them, as well as a new signing with Osno and Raphael. These will bring about benefits for the financials. In addition, we are planning to sign other artists going forward, which will bring about benefits for the profitability.
As for our attitude towards additional acquisition of independent labels, as we mentioned, we do not confine ourselves as just a K-pop company. We would like to expand the genre lineup, so we're open to potential acquisition of additional independent independent labels. Thank you.
[Foreign language]
[Foreign language]
The following question will be presented by Eric Cha from Goldman Sachs. Please go ahead.
[Foreign language]
I'm Eric Cha from Goldman Sachs. Thank you for the opportunity. You mentioned during the presentation that new girl group, in collaboration with you, with UMG, will debut in Q3. What does it exactly mean? Does it mean that they already have a set number of members for the group, and they've done pretty much all the training and their music, and the album will be released in Q3, or does it mean something else? We have huge expectations because this is a new attempt, and I'd like to know if it's going to be more in line with the K-pop and HYBE style of album and music by releasing the physical album, followed by concert and merch sales.
Is that going to be how you're going to generate revenue from this group, or is it going to be more in line with what foreign artists or Western artists are doing and focusing on the digital? The second question may be on overlap with the previous questions when it comes to the postponement of Weverse membership launch. I can see that this is quite a significant delay, and we'd like to know the main reasons why. Of course, you can think about various reasons, including effort to diversify the services and enhance the quality of the services and allow other artists to join the platform in the meantime. What should be the main or primary reason behind the decision to postpone the launch of Weverse membership?
[Foreign language]
When we mentioned that the new girl group in collaboration of UMG, will be announced in Q3, does not mean that this group will debut, but there will be a lineup of events, various events to introduce this new group in terms of the format and the method and the process and the kinds of talent that we will have for this group. As for the second question, with respect to postponing the launch of the Weverse membership, we have not changed the overall direction of this membership program itself. When it comes to the specific designing, there are very detailed requests and expectations that are quite different from artists, from fans, and from labels.
It takes some time for us to coordinate these different expectations so that we can introduce a well-designed service as a package, and that is why we have decided to postpone
[Foreign language]
This concludes Q2 earnings call for HYBE. Thank you.