HYBE Revenue Up 31% But Losing BTS Will Squeeze Margins in2023

Even with BTS on hiatus, HYBE's earnings grew 30.6% to 445.5 billion KRW in the third quarter of 2022, the company reported, but were 13% below second-quarter revenue of 512.2 billion KRW.

Jin de BTS canta 'The Astronaut' con Coldplay en concierto en Buenos Aires: Míralos

The “artist direct-involvement” segments of the business showed mixed results in the quarter. Music sales of 129.2 billion KRW ($89.5 million) were 0.4% year-over-year and 38.7% lower than the previous quarter. Concert revenue of 47.2 billion KRW ($32.7 million) was a vast improvement over zero in the third quarter of 2021 but lower than the first and second quarters. Revenues from ads, appearances and management fell 11.7% year-over-year to 29.8 billion KRW ($20.2 million).

HYBE saw better performance from its “artist indirect-involvement” segments that are less dependent on the timing of music releases and tour dates. Merchandising and licensing revenue grew 49.5% year-over-year to 144.7 billion KRW ($100.3 million). Contents revenue climbed 22.9% to 107.2 billion KRW ($74.3 million). And fan club revenue improved 27.5% to 17.3 billion KRW ($12 million).

Though the first nine months of the year, HYBE’s revenue improved 55.7% year-over-year to 1.24 trillion KRW ($859.2 million) and its operating profit increased 59.% to 185.9 billion KRW ($128.8 million). Operating margin improved from 14.6% to 15%.

Despite the impressive growth, HYBE is facing a dilemma. The company is without its biggest artist, BTS, after members went on hiatus earlier this year and will soon face mandatory military service in Korea. Losing its cash cow — until “around 2025,” according to an Oct. 17 letter to shareholders from CEO Park Ji-won — leaves Hybe with a tricky balancing act: In the absence of BTS new music and tours, the company must make up the difference with individual members’ solo projects and a slate of successful and up-and-coming artists. With only a retrospective album, Proof, and no concert dates since April, BTS will still account for 60-65% of HYBE’s 2023 revenue, Park said during the earnings call. The remaining 35-40% of revenue will come from a growing roster of young artists and Ithaca Holdings, which HYBE acquired in 2021.

In recent years, HYBE has diversified to reduce its reliance on BTS and build a more stable portfolio of companies and artists. Through its nine record labels in Korea, Japan and the U.S., HYBE has built a diversified roster that “helps us avoid a risk of concentrating on a certain country, a certain genre, and allows us to flexibly respond to the changing external situations and trends, thereby reducing the overall business risk,” said CFO Lee Kyung-Joon.

Ithica Holdings added both recorded music catalog (through Big Machine Label Group) and artist management clients (through SB Projects). Its founder, Scooter Braun, is now co-CEO of HYBE America. When asked by an analyst what synergies Ithaca provides more than a year after the merger, Park pointed to the newfound ease and efficiency of launching projects in the U.S. under Braun and co-CEO Lenzo Yoon. Also, Ithaca’s U.S. artists will join HYBE’s WeVerse social media platform in 2023, Park added, and HYBE is pursuing opportunities for the businesses of Ithaca artists Justin Bieber (Drew House) and Ariana Grande (R.E.M. Beauty) in Asia.

In Korea, HYBE’s roster includes such up-and-coming artists as Le Sserafim, released through its Source Music imprint, whose first two albums have surpassed a combined 1 million units sold. NewJeans, released through HYBE’s ADOR imprint, has cumulative sales of 620,000 of its debut, self-titled EP released in August. Outside of Korea, HYBE is taking its model for discovering and developing new artists to the world’s two largest music markets. In Japan, HYBE Labels Japan is prepping the December launch of &Team, a nine-person, multinational boy band. In the U.S., HYBE has a joint venture with Universal Music Group’s Geffen Records and is developing a global girl group.

Hybe’s plan for global growth goes beyond its growing artist roster. A broad strategy termed by Park as “expansion through cooperation across boundaries” includes mergers and acquisitions, joint ventures, equity investments and partnerships. “In order to expand the multi-label strategy, we’re considering various partnerships and investments with labels, catalog companies and talent management companies in overseas markets such as the U.S. and Japan, thereby strengthening our music I.P. portfolio,” Park said. “Through this approach, we except that greater synergies will be created with our superior solutions capability on concerts, merchandising and content to deliver greater results.”

But in the short term, HYBE doesn’t have a quick solution for replacing BTS, and Park warned that declining BTS revenue — namely lost concert revenue — will put pressure on HYBE’s margins in 2023. That should change as groups such as Seventeen and Tomorrow X Together gain popularity and perform in larger venues. Compared to BTS, those artists’ margins are “not very different from the margin of BTS — other than concert revenue,” he said. “Therefore, as these groups continue to grow, I believe that margin will improve accordingly…starting from 2024.”

With HYBE’s share price down 64.9% year to date, mostly due to BTS’s hiatus, the company is considering additional ways to improve shareholder return, including share buybacks and dividends. Park said the company will reveal more about those plans in early 2023.