CJ ENM Co Ltd

KOSDAQ:035760

Earnings Call Transcript 2023-Q2

[Kay Choi, executive]

[Interpreted] Good afternoon. This is Kay Choi of CJ ENM's IR team. I thank the shareholders and analysts for taking time out of your busy schedule to attend our earnings session.

We will now begin the 2023 Q2 earnings session of CJ ENM. Please note that the financial and management results presented today have yet to undergo an independent auditor's review and could be subject to changes upon this review.

Today, we have with us CFO, Deuk-su Hwang and Heads of different business divisions, including [ Mr. Ki Sangho ] from Media Platform; Chang-Gun Koo from Film and Drama; [ Long-ju Ok ] from Music and [indiscernible] from Commerce. From Studio Dragon we have [ Chong-hul Chang; ] and from TVing, we have CEO Choi Ju-hui; from Global Business, we have Steve Chung. And from CJ ENM Studios, we have Yoon Sang Hyun; and also we have our CSO, [ Jey-Hyun Kim ] with us.

First, the CFO, Deuk-su Hwang, will brief you on our midterm business strategies.

[Deuk-su Hwang, executive]

[Interpreted] Good afternoon. This is CFO Deuk-su Hwang from CJ ENM. Despite the sluggish market conditions and toughest competition in the first half, CJ ENM enhanced its core business competitiveness. The numbers were lower than market expectations and there were highlights and lowlights from different business units, but the company enhanced its content competitiveness in the global market and fortify competency as the platform business beginning our leap towards being a global IT power hub.

CJ ENM greatly enhanced its content influence in the global market in the first half. TV ad sales decrease was inevitable with slow domestic ad market. But the company recorded global OTT viewing rate of 28.8%. And our overseas content sales increased 30.8% Y-o-Y, continuing our content IP power enhancements. With our content library, paying TV subscribers increased 69.2%. Overseas sales contributed to 39.3% of the music business sales with continued growth momentum.

The business environment seems to have passed the trough. CJ ENM is putting all its efforts to realize a more meaningful growth in the second half and year 2024. We are optimizing content investment and enhancing platform competitiveness of TVING through diversification of business models. [ Video ] production synergy will be strengthened with higher hit ratio and more sophisticated process in place.

Features business concentrates select-and-focus strategy and is reading PT optimized [indiscernible]. Music business will expand global human IP, including ZEROBASEONE and [ ILN2 ]. With more advanced fan-com platform, the business will continue its growth in the global market. This season will enhance its production and position fundamental despite the issues in the U.S. territory to focus on profit structure improvement and the turnaround. Commerce business is focused on profitability through expansion of One-Platform strategy. The company will further improve financial stability through cash flow improvement and [ antisecurtization ].

I really thank our shareholders and analysts for your continued support. And CJ ENM, as a representative of domestic content company and as a growing global player will enhance our results going forward. Thank you.

Next is our results presentation. CJ ENM's quarterly [indiscernible] are based on K-IFRS [indiscernible]. The early comparison is on a pro forma basis, and internal transaction numbers have not been eliminated from different businesses' operating results. Now, we will hear the company's management results for Q2 2023.

[Unknown Executive]

[Interpreted] Good afternoon. This is [ Chang-buk Hwang ] from CJ ENM Finance. Consolidated revenues in Q2 decreased 12% Y-o-Y at KRW 1.489 trillion, with an operating loss of KRW 30.4 billion. Entertainment recorded revenue of KRW 703.1 billion and operating loss of KRW 49.1 billion. With decrease of loss from FIFTH SEASON and with cost efficiency efforts of channel business, the business decreased the level of loss compared to the previous quarter. Commerce revenue stood at KRW 345.7 billion, with operating profit of KRW 18.7 billion. The business showed improved profitability than the previous quarter with higher profit portfolio programming.

Content investment efficiency measures will continue in the second half, and the company will focus on profit improvement with expanded global distribution. Content results will be maximized with platform integrated operation strategy between channels and TVing. Production cost rationalization will be enhanced. Please refer to the material for detailed information. This concludes the presentation.

We will continue with the presentation from Studio Dragon.

[Seong-Ho Jang, executive]

[Interpreted] Yes. Good afternoon, this is CFO Seong-Ho Jang from Studio Dragon. I will brief you on our management results for Q2 2023. Revenue for Q2 rose 3.8% Y-o-Y at KRW 163.5 billion. Studio Dragon continued its growth with global OTT-bound originals and sophisticated new types of overseas sales strategies. And despite the sluggish indiscretion and the decrease in aired titles, we were able to achieve this result. Our operating profit recorded KRW 16.3 billion. Even with the high baseline effect that came from last year's one-off library sales, the company proved its capability to generate profit with higher new title ASP.

Studio Dragon will focus on mid- to long-term content strategy to preventively address changes in the media environment and complete our global studio model. We will present a portfolio blueprint that tailors to the global drama market with 10 core titles, including [indiscernible] and also content production system. The company will focus on profitability improvement and quality individual IPs and higher [indiscernible] to prepare for a bigger leap towards being a global company. Thank you.

[Kay Choi, executive]

[Interpreted] Now we will be entertaining your questions. In consideration of time, please keep or limit your questions to 3 each, centering around core issues.

[Operator]

[Interpreted] [Operator Instructions]

The first question will be given by Minha Choi of Samsung Securities.

[Minha Choi, analyst]

[Interpreted] Yes, I will give you the calculation to the 3 questions. So all of the questions are addressed to [indiscernible]. First is on losing net sales. I've seen slight improvement in the Q2 numbers. It's because of the seasonality Q2 seems to have in higher season, but we do expect to see a lower season in Q3. So what is your outlook or forecast with the overall TV ad sales market in the second half? This is the first question.

And the second question is related to your FIFTH SEASON business. It seems that the loss has somewhat decrease. But could you please give us more color on it, maybe perhaps in the format of numbers? And could we also get your, number-wise, results for TVing as well?

And the third question is also related to this FIFTH SEASON. Well, it was guided that titles, the number of titles to be delivered by FIFTH SEASON for this year as a whole was somewhere between 24 to 28 titles. And I believe 3 titles have been delivered in the first half. So if possible, could you give us a breakdown of how many titles will be delivered for different cohorts? And if that's not possible, could you give us a guideline as to how many titles could be delivered in the second half?

[Unknown Executive]

[Interpreted] So the first question will be addressed by Ki-Sung Hong from Media Platform. And the FIFTH SEASON question, the third question actually will be addressed by [ Ms. Calabrese ] from FIFTH SEASON.

[Ki-Sung Hong, executive]

[Interpreted] Yes, on the ad market for year 2023 as a whole, it's true that, in general, the third quarters are lower season for ad market. And well on a Y-o-Y basis, as you've mentioned, we have seen a slight improvement in the second quarter.

Well, I cannot give you a concrete expectation or forecast when it comes to the domestic ad market. But I believe that there are many companies that are readying themselves with new campaigns that are slated for Q4. Well, this has been posed by many ad agencies is not -- so cautious, so we look forward to a better fourth quarter.

[Unknown Executive]

[Interpreted] Yes. Now the revenue for TVing. It was at KRW 76.7 billion with an operating loss of KRW 47.9 billion. And the numbers for FIFTH SEASON, its KRW 76.2 billion with an operating loss of KRW 32.6 billion.

[Unknown Analyst]

[Interpreted] And Ms. [ Calabrese ], I will be hearing your answer now.

[Steve Chung, executive]

So actually, KC's having some audio difficulties. So this is Steve Chung, Head of Global division for CJ ENM, and I will answer this question.

[Interpreted] In terms of guidance for the number of titles for the second half of this year, as you may know, we are actually under a historical time in that we have 2 labor unions on strike, the writers' union and the actors' union. And this is the first time in 60 years that the 2 unions are striking at the same time.

And our company hopes that we will resolve this quickly with a positive outcome for all parties involved. But at this time, given that the 2 labor unions are concurrently on strike, it is difficult to guide how many titles will actually be delivered because many of them still need to be sort of finished in terms of its complete production for delivery. So at this time, it's very difficult to give guidance on the actual numbers that we will be able to deliver. But as you know, and as you alluded to in your question, the majority of the titles were scheduled to be delivered in Q3 and Q4 this year. And as soon as we get clarity on the situation, we'll be able to let -- sort of guide to what the final number will be. But at this time, that will be difficult to do.

[Operator]

[Interpreted] The following question is by Hoi Jae Kim of Daishin Securities.

[H.J. Kim, analyst]

[Interpreted] Yes, in your presentation, you alluded to fundamentally strengthening production and distribution business, the FIFTH SEASON. Could you provide us with more color or what you're about to embark on? This was my question relating to FIFTH SEASON.

My next question goes to Studio Dragon. We've heard that you've entered into new agreements with Global OTT on more terms and conditions. And with that, when will we see a significant improvement in your margins? And could you please provide us with update on your upcoming project?

And my last question, the third question is related to the least divestments of this. And what will your business direction take or what form will it take going forward with the divestment or [indiscernible]?

[Steve Chung, executive]

So I'm not sure if I understood exactly the question, but I think that as I understand, the question is, in our earlier comments, we talked about strengthening the production and the fundamentals of the business and what we will do in the second half. If that's indeed the question, I think there are a few things that we are doing. Obviously, number one, from an interest sort of rate perspective on the macro situation, we are making sure that any new projects that we undertake have a sort of a profit margin that we believe will be sustainable. And so in every aspect of our operations, we are taking into account all the different factors that contribute to profit margins of our projects. So that's one from a financial perspective.

Secondly, while the strikes are going on, we are making sure that our team continues to focus on making progress with development, both at studios and at networks to continue to further the projects that we have in the pipeline. And so with each of those efforts, when the strikes are over, we believe that we will be in a position to really -- be in a position to take advantage of the situation and emerge stronger once the strikes are over.

There's a lot of other efforts underway to make sure that we are looking at every expense, while the strikes, especially, are underway and to make sure that we have fiscal discipline in terms of managing our cost basis. So those are some of the efforts that we are underway that, again, we're undertaking now. But in terms of -- as I said in my previous answer, because it is an unknown when the strikes will end, it's very difficult to give any guidance financially on the outcome of what we expect the second half to be. And when that changes, obviously, we'll hopefully be able to share more with everybody. Thank you.

[Unknown Executive]

[Interpreted] Yes. Now on the new favorable terms and conditions as a global OTT at Studio Dragon are that new more favorable terms and conditions will apply [indiscernible] for the prebuy. And in spite a rather slow domestic result, our Q2 numbers proved steady. And on the originals, the new terms and conditions will be apply starting in '24.

[Unknown Executive]

[Interpreted] Yes. And on our global projects, well, there is some mentioned writers and actors strike in the U.S. market, but that's a little is on our business. The big [indiscernible] pricing on to has completed tank up, and now we're working on the detail.

And on funding and production, We're Crash Landing On Love and developers, well, these are titles that have been written by a Korean writer. So the U.S. guys had little influence on these projects. And well, with the situation in the U.S. market, I think it's an opportunity for us to increase the presence of Korean content there.

And as for business in Japan, the actors are finished reading together the script, and production will begin in August. And it's slated for release in year 2024. So the project will be simultaneously released in -- through local channels and global OTT.

[Unknown Executive]

[Interpreted] Yes. This is [ Yong-ju Ok ] from Music business, addressing your question. Well, as you know, we've made a decision with the [ IP ] lab. It was to enhance our IP related to our artists. As you're well aware, Mnet has its planning capacity and all the capacity when it comes to live concerts and high excels in production. And our work together led to the [indiscernible] and that was a great result for both parties. And it was a good chance to learn from each other and also to cooperate based on each other's merit. .

And with this collaboration, we have seen our [indiscernible] to do well as the teaser released for Island season 2 in July. And this -- the production of it was done by a star producer [indiscernible]. And well, all those efforts have been in place to enhance our in-house IP. And well, we've had in-depth discussions with [ Hive ] and our needs actually cut together in making this ultimate decision. So we're going to focus on enhancing our artist IPs plus the [indiscernible] IPs are held by Mnet.

[Operator]

[Interpreted] The next question is from [ Anjeong Shin ] of DB Financial Investment.

[Unknown Analyst]

[Interpreted] Yes. The first question is for TVing. There have been many press reports about a possible merger with Wave. Will that be a likely possibility? And do you have any thoughts on that? This is my first question.

My second question also goes to TVing. You talked about the ticket buying profit, and what kind of model are you going to pursue in diversifying your profit sources? And now, the third question is on divestment of assets, especially that of Netmarble stakeholding, [indiscernible] age TAM with your stakeholding in that Netmarble. Will there be actually a sale of your stakeholding?

[Unknown Executive]

[Interpreted] Yes, it's true that there have been various reports on the possibility of a merger between TVing and Wave. Well, the competition in the OTT market, as you well know, is very fierce. And especially, the competition is really fierce with the global OTT players. And it's also true that the domestic OTT companies have some improvement when it comes to do -- when it comes to their profitability. So the market condition is not that favorable.

Having said that, as was mentioned in the presentation, the paying subscribers for TVing, it grew 70% on a Y-o-Y basis. And we could talk about under the diversification in our profit model. And with more diversity in our profit model, we will be seeking a top-line growth. And we will be working with original content and TV content. And also, we will be working on adding more sophistication to our services and with content improvement and the better services, we will be enhancing competitiveness of TVing as a whole.

And with the given situation, given market situation in the environment, a possible merger would be a difficult thing to actually implement. So we are not, at this given point in time, actively considering a possibility. We will, as we mentioned, be working with our content and service sophistication in the second half.

[Unknown Executive]

[Interpreted] Yes. This is CEO [indiscernible], addressing your diversification-related question. Well, we will be working with enhancing the number of paying subscribers and also the subscription model. So as you're well aware and as we have discussed in the future, we will be working together with the channel to enhance synergy. And we will be working on IP-based content, and we will also be intensifying our digital marketing activities. With that, we hope to provide an improved service as well when it comes to more personalized curation and search and easier to use UI and UX. Well, this being implemented will add to our platform competitiveness. And well other than the simple subscription model, we could also work with ad watch models, and we could also introduce new pricing zones for diversity.

Yes. Now on your divestment question. Well, we have been making efforts to divest and securitize our nonoperating noncore assets that we are currently looking into various possibilities. And we do understand that the market has some concerns over our financial stability. It's true that we have to unwind some of our asset holdings. And -- but having said that, we also have to pay attention to the given market conditions to maximize our divestment results.

So in the first half, we looked at the various possibilities, and we sold off our stakeholding in Samsung Life and LG Elevation. Although it was not a big amount, this execute and we are currently studying other ways to give you a more meaningful result in the second half that will give you more tangible results hopefully in the second half. But as to the actual holdings of specific companies, please understand that we are not at liberty to disclose this information.

[Operator]

[Interpreted] The following question will be given by Hyunji Lee of Eugene Investment Securities.

[Hyunji Lee, analyst]

[Interpreted] Yes. I have 3 questions. The first is also of 251. Well, I believe that you've delivered 3 titles in this quarter, and well, even with the -- if the 3 titles delivered, we look to the loss numbers that you have reported today. Well, this means you must have quite a heavy fixed cost. My calculation gives about KRW 35 billion. So could you please elaborate on that? .

And my second question is to TVing. You did mention that the number of paying subscribers had grown significantly, but compared to your Q1 numbers, the loss has deepened. Is it because of amortization reasons? Or is it because of your ASP? I would like to get more color on that.

Now, my third question is on your divestment and securitization efforts once again. What's the level of borrowing that the company has? And what is the level of cash to service that borrowing?

[Steve Chung, executive]

Thank you for the question. I think 2 parts to it. First of all, on the revenue for second quarter. We had some titles that were originally slated for delivery and also revenue generation in Q2. But we have decided, based on the market conditions, especially in the film and documentary titles that it would be more beneficial to wait to be able to sell or license those titles. So the 2Q numbers sort of reflect that today.

But to the second part of the question of in terms of our expenses and fixed costs. As I said in my previous answer, we are working very closely with the FIFTH SEASON management team to look at all expense line items and to make adjustments as necessary. And closely monitoring the situation of the strikes so that the business can be nimble and at the appropriate expense levels to deliver on to our financial goals and our business performance. So those activities are undergoing actively to look at every expense line item to make sure that we remain fiscally responsible and disciplined.

[Unknown Executive]

[Interpreted] Yes, it's true that our loss has somewhat increased in the second quarter. It's because we have big [indiscernible] titles or the originals, including Island 2 and Duty After School that was shown in the first half. And well, amortization of these IPs coincided in the second quarter. And with that, our numbers, the loss numbers have somewhat widened. It's not because of a lower ARPU that we have seen an increase in our loss numbers. It's just because of the coinciding amortization period. But going forward in the second half, we will be allocating or meeting the original title in a more timely fashion. And with that, our numbers will most likely see an improvement. And we will also be looking to co-production opportunities with the drama channel in order to enhance the profitability.

[Unknown Executive]

[Interpreted] And if I may add to the amortization-related question, the amortization of our intangible assets. If you look at our cost, if you will refer to the materials that we have distributed, our cost stands at 8.9%. That's a significant decrease on a Y-o-Y basis. And amortization cost, it was at KRW 205.5 billion at a rate of 30%. Last year, that same number was over 40%. It means we have seen much improvement when it comes to efficiency and programming. And as was mentioned in the previous answer, there was an overlap of amortization period for the 2 large tentpole titles. But once again, it would be more even for that going forward.

[Unknown Executive]

[Interpreted] Yes. Now on the borrowings question, your third question. Well, as of end of June on a consolidated basis, our total borrowing stand at KRW 3.4 trillion, with KRW 1.6 trillion being short-term borrowings, that's about 48%. And our cash on a consolidated basis stands at KRW 900 billion. So that leaves our net borrowing at KRW 2.5 trillion. And as was mentioned, we will be engaging in early digitization as was in the second half, and we will be servicing back our borrowings through our securitization efforts. And well, it will -- the efforts will mostly focus on the short-term borrowings. And should we not be able to service the maturing debt. We will have no new issues with refinancing our short-term borrowings because the short-term borrowings on line mostly with the Studio Dragon or persist [indiscernible] guaranteed by ENM. So we have no issues, we'll be financing them.

[Operator]

[Interpreted] The next question is from Yong Hyun Choi of KB Securities.

[Yong Hyun Choi, analyst]

[Operator Instructions] Today, you're the numbers 2 [indiscernible]. And what is your thinking on ARPU, your ad and perhaps a possible attrition? And my second question goes to FIFTH SEASON. There have been reports of FIFTH SEASON receiving equity investment. What is the progress today?

[Unknown Executive]

[Interpreted] Yes. Well, with increasing ARPU, could there be some attrition of our subscribers? Well, it's natural that you considered this, but we have weighed the risk and the benefits. And our conclusion is that the benefit far outweighed the associated risk because we have proven loyalty and stickiness with our subscribers with strong content provided by CJ, we have witnessed a strong loyalty and stickiness of our subscribers. And we would also be actively engaging in marketing activities, including promotions and marketing. And with that, we have safely concluded that the benefits include -- associated with our increase in ARPU far outweighs the risks.

[Unknown Executive]

[Interpreted] Yes. Now once again, back to FIFTH SEASON, it's true that the business is in a difficult environment, but I do not foresee any operational cash flow-related issues with that business. It's true that the business is looking ways to realize the turnaround. But at this given point in time, I cannot give you any comments on the mentioned external equity investment.

[Kay Choi, executive]

[Interpreted] Well since there are no more questions, we can conclude the Q2 2023 earnings presentation from CJ ENM. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]