CJ ENM Co Ltd

KOSDAQ:035760

Earnings Call Analysis

CJ ENM Reports Strong Q2 Growth in Revenue and Subscriber Base

In Q2 2024, CJ ENM reported a consolidated revenue of KRW 1.1647 trillion, marking an 11% year-on-year increase. Operating profit reached KRW 35.3 billion. The TVING streaming service saw a 29% rise in paying subscribers, contributing to a revenue growth of 41%. The entertainment segment rebounded with KRW 792.8 billion in revenue while commerce generated KRW 371.9 billion. Notably, Fifth Season experienced a 106% revenue increase year-on-year. The company plans to further enhance traffic and profitability, aiming for a positive trend in the second half.

Strong Q2 Result with Improved Profitability

CJ ENM reported a solid second quarter for fiscal year 2024, achieving consolidated revenues of KRW 1.1647 trillion, an 11% increase from the same period last year. The operating profit stood at KRW 35.3 billion, showcasing a turnaround in profitability. This growth was primarily driven by its entertainment and commerce segments, with entertainment revenue reaching KRW 792.8 billion and commerce revenue at KRW 371.9 billion.

TVING's Rapid Subscriber Growth

One highlight of the earnings call was the performance of TVING, CJ ENM's streaming platform. The number of paying subscribers surged by 29% year-over-year, and monthly active users exceeded 7.56 million. Revenue from TVING climbed to KRW 107.9 billion, while the operating loss decreased significantly to KRW 11.7 billion. The company aims to enhance traffic by focusing on premium content in the second half of the year.

Significant Revenue Growth in Music and Content Sales

The music division contributed significantly to international revenue, which grew by 29% year-over-year. Key album releases and artist debuts, particularly from INI, JO1, and ME:I, bolstered this growth. Additionally, overseas content sales performed well, led by Fifth Season, which experienced an exceptional revenue recovery of 106% year-over-year. Notable titles like 'Queen of Tears,' 'Lovely Runner,' and 'The Midnight Romance in Hagwon' achieved strong sales across various regions.

Focus on Profitability for the Second Half

Looking ahead, CJ ENM's management emphasized a shift in focus toward profitability in the second half of the year as opposed to just revenue growth. The company is refining its mid-term business strategy to strengthen competitiveness in each business division. They expect to see improved margins as they continue consolidating their content resources and improving operational efficiencies.

Equity Gains and Financial Strategy

During the earnings call, executives highlighted a non-operating gain of KRW 42.2 billion primarily through equity investments, particularly from Netmarble Holdings. Management confirmed that they are actively managing their debt levels, which they aim to improve in 2024 while capitalizing on the gains from equity sales to service outstanding debts.

Leadership Changes to Drive Future Growth

Recent management changes, including a new CEO for CJ ENM and Studio Dragon, signal a strategic pivot toward enhancing content competitiveness and operational success. The new leadership aims to position the company as a global powerhouse in content creation, reflecting ongoing efforts to produce high-quality entertainment that resonates with both domestic and international audiences.

Revenue Guidance and Budget Management

CJ ENM anticipates continued revenue growth trajectory, bolstered by strategic enhancements in content, especially in light of successful titles premiering later this year. With the aim to regain distribution rights to several key titles, the company plans for robust revenue generation in the upcoming quarters. They project a capital increase of around KRW 100 billion to support operational costs while managing their assets effectively.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the Fiscal Year 2024 Second Quarter Earnings Results by CJ ENM. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions]

Now we shall commence the presentation on the fiscal year 2024 second quarter earning results by CJ ENM.

[Kay Choi, executive]

[Interpreted] Good afternoon. This is Kay Choi from CJ ENM's IR department. I thank the shareholders and analysts for taking time out of your very busy schedules.

Now we will begin the earnings release session for CJ ENM Q2 2024. 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 such review.

We have here with us, CFO, Deuk-su Hwang and heads of different business units. From media, we have Ki-sung Hong; from film, [indiscernible]; music, [ Chung Kwanxin ]; Global [ Tund Hujo ]; and from commerce, we have [ Songbae Pak ] and from Studio Dragon, we have [ Tugsun Ko ]. From Tving, we have CEO, Ju-hee Choi and from CJ ENM Studios, we have CEO [ Yoon Sang Hyun ].

First, CFO Deuk-su Hwang will deliver the company's management plans and goals.

[Deuk-su Hwang, executive]

[Interpreted] Good afternoon. This is CFO Deuk-su Hwang. CJ ENM continued its effort to further enhance platform competitiveness and premium IP. And as a result, entertainment exceeded its turnaround and commerce continued its profitability recovery despite continuing difficult market conditions.

Platform revenue and overseas sales growth stood out in Q2. Since revenue growth based on business competitiveness, the company will focus more on profit growth in the second half.

Paying subscriber of TVING rapidly grew at 29% Y-o-Y. Both subscription and advertisement revenue performed well, leading to a rapid revenue growth of 41%. OnStyle and Commerce also saw rapid growth in mobile channels and live commerce GMV. Both entertainment and commerce businesses further strengthened their platform competitiveness.

Music enhanced international revenue with new album releases and artist debuts. Overseas revenue continued its growth momentum with 29% Y-o-Y growth. INI, JO1 and ME:I's [ album sales ] contributed much to the revenue growth. Cost of revenue is to increase in the second half with activities including ZEROBASEONE's Asia concert.

The company continued to strengthen overseas content sales, focusing on premium IPs. Fifth Season saw a pronounced recovery of revenue. Queen of Tears, Lovely Runner, The Midnight Romance in Hagwon showed strong sales in different regions. With recovering content production and delivery, Fifth Season's revenue increased 106% Y-o-Y.

The company is continuously strengthening profit focused management stance. This stance will continue into the second half of this year. We are also working on the improvement of midterm business strategy and structure, which will in turn fortify each business division's competitiveness. I thank the shareholders and analysts. This concludes the presentation. Thank you.

Next is the results presentation. CJ ENM quarterly and yearly results presentation is mainly based on the K-IFRS and is on a consolidated basis. Year-on-year comparison is on a pro forma basis and business unit operating profit includes internal transactions. Now we will be hearing Q2 2024 company-wide management results.

[Unknown Executive]

[Interpreted] Good afternoon. This is [ Jin Yong Kim ] from Finance. Consolidated revenue in 2024 Q2 stood at KRW 1.1647 trillion, which is an 11% increase over the previous year. Operating profit at KRW 35.3 billion saw a turnaround. Revenue for entertainment recorded KRW 792.8 billion, with operating profit of KRW 7.8 billion and commerce revenue stood at KRW 371.9 billion with operating profit of KRW 27.5 billion.

Paying subscribers to TVING continued to increase and MAU passed [ 7.56 million ] mark, continuing its growth. The company is going to further enhance traffic in the second half, focusing on premium content. Fifth Season aims for production, delivery and global distribution expansion. Music business will continue expanding artist album activities and live concerts, including the debut of a new girl group, Izna. Commerce will further enhance its profitability by strengthening its mobile capacity and content commerce energy or synergy. Please refer to the presentation deck for details of different business units. Thank you. Now we will be hearing from Studio Dragon. [Interpreted] Good afternoon. This is CFO [ Kwang Seok Go ] from Studio Dragon. I will brief you on Q2 management results. Despite the 49.4% decrease Y-o-Y of aired episodes in Q2 2024 with big titles such as Sweet Home 3, increase in overseas ASP and diversification of IP, our revenue recorded KRW 137.1 billion, which is about a 16% decrease over the previous year, minimizing the impact from decrease in aired episodes.

Even with some glitch in revenue and added depreciation burden from the previous quarter's big titles such as Queen of Tears, the company well defended its operating profit that recorded KRW 10.5 billion, with increase in overseas revenue from library titles and strengthened production settlement processes.

There will continue to be difficulties in the second half, but as a leading company, we hope to lead the new paradigm in the drama industry. Rapid growth of OTTs after COVID led to a boom of K-drama and the company, too, but was also accompanied by side effects such as tougher competition and rising production costs.

With management change, the company hopes to enhance its corporate value. First, we will produce quality content by securing human IP and creative binding. We will concentrate on securing new growth engines with improved profitability through the establishment of production guide and process and also by creating new business opportunities, both home and abroad.

Thank you. [Interpreted] Now we will move on to Q&A. In light of time constraints, please limit your questions to 3 per person [indiscernible].

[Operator]

[Interpreted] [Operator Instructions] The first question will be given by Kim Hoi Jae from Daishin Securities.

[H.J. Kim, analyst]

[Interpreted] Yes, I will give you the translations to the 3 questions. First question is on the progress of your LiveCity project. Is it a complete stop? And how will it reflect in terms of finance? And when will the financial numbers be out?

And now on to the second question. The company has recently witnessed management change, both in CJ ENM and also Studio Dragon. Does that mean that there is an overall change in your media content strategy?

And now on to the third question. Well, I see that you still are in a loss situation when it comes to your pictures and drama businesses. So could you please give a carve-out of the Fifth Season numbers plus your other movie and drama numbers?

[Unknown Executive]

[Interpreted] Yes. If I may address your first question, which was on the situation of our LiveCity project. Yes, we've been notified by EV province of Gyeonggi that they will be nullifying our basic contract. But we have raised our objection and we are continuing our discussion and well, our asset in construction amounts to KRW 260 billion in our consolidated balance sheet. And our payment guarantee reaches about KRW 480 billion. But the maturity is long out and stretches until 2026 and the amount is spread over until 2026. And all the mentioned numbers have been reflected in our financials. Therefore, we will be feeling no further burden to our numbers. And should there be any other situations that arise, I think we are fully prepared to respond to them.

And if I may elaborate further, well, to fuel the operation costs for LiveCity in the second half of '24 and also for servicing purposes, there is a possibility that the company goes for a capital increase amounting to somewhere around KRW 100 billion. [Interpreted] And if I may elaborate more on the answer that was provided as was released in our disclosure, our asset in construction amounts to somewhere around [ KRW 250 billion ] and we have yet to write off this amount because as was mentioned in the previous answer, we're still in a negotiation process and the amount mentioned could be changed. And they're all tangible assets. So it's most likely that the number sees a decrease. And as for our payment guarantee, well, it comes with different timing. And should we service it back? Well, it's all spread out. [Interpreted] Yes. Now to address your second question, as you have asked, we've seen some changes in our leadership. ENM has seen a change of CEO and also more recently the CEO of Studio Dragon has been changed too.

And as you're well aware, the previous CEO has resigned for personal reasons. Mr. Koo has resigned because of personal reasons. And in his position now we have a new CEO, Yoon. And we did communicate to the market that we hope to become a global IP powerhouse centering on content. And this mission still stands. We hope to provide the market with well-made content and through that, we hope to enhance our profitability. So this is still our basic stance.

And as for the change in leadership of Studio Dragon, well, we've seen an appointment of a new CEO, Mr. Jang. And he has a very strong background when it comes to drama and the content industry. And this is once again an illustration on how focused the company is on enhancing its content competitiveness. [Interpreted] Yes. If I may give you the numbers for the Fifth Season, their revenue stood at KRW 157.2 billion with an operating loss at KRW 20.2 billion. And as for pictures, there weren't that much noticeable releases in the domestic market. But we did get much international success, which was enough to cover our fixed expenses, giving us an operating profit of KRW 3.4 billion.

Next question please.

[Operator]

[Interpreted] The following question is by Shin Eun Jung from DB Financial Investment.

[Eun Shin, analyst]

[Interpreted] Yes. I have 3 questions. First is on your profit numbers. I see they stand quite strong. So were there any non-operating profit that the company has witnessed? So that's my first question. And now my second question. Could you give us the revenue number and operating profit number for TVING? And third question is also on TVING. You've attracted a lot of traffic to KBO. And how are you going to maintain it while you acquired through KBO and how are you going to maintain that traffic going forward? And if you're going to maintain this level of traffic through providing more originals, that could lead to a greater number when it comes to write-offs, which in turn could lead to bigger loss numbers.

[Unknown Executive]

[Interpreted] Yes. This is Kim once again from Finance, addressing your question. Well, the biggest non-operating gain that we've witnessed is through our equity method. Well we've gained KRW 42.2 billion through our investments. And on a Y-o-Y basis, that's an improvement by KRW 53.7 billion and our interest expense stood at KRW 40.7 billion, whereas our interest income stood at KRW 9.4 billion. [Interpreted] And now on to your second question, which was on numbers for TVING. Our revenue for TVING stood at [ KRW 107.9 billion ] and our loss really saw a big decrease to an KRW 11.7 billion level.

[Interpreted] Yes. This is CEO [ Cho ] addressing your TVING retention-related questions. Yes, even from our earliest planning stage onwards, we thought about what we could do to prevent attrition after the KBO season. So starting November, we do expect to see some natural attrition with the baseball season off. But we have in place a plan to minimize this number. And we would be doing this through several content. We will be working with KVL, the Korea Volleyball League, to attract the attention of the baseball lovers to other sports similar to baseball. And we are also going to work with documentary -- documenting how baseball players do off-season. And also, we're going to provide training video footage of different teams.

[Interpreted] Next question please.

[Operator]

[Interpreted] [Operator Instructions]

[Unknown Executive]

[Interpreted] Since there are no follow-up questions, we will now conclude the earnings session of CJ ENM. Should you have any other follow-up questions in the future, please don't hesitate in contacting our IR team.

[Operator]

[Interpreted] The following question is by Lee Ki-hoon by Hana Securities.

[Ki-hoon Lee, analyst]

[Interpreted] Yes. I have actually 2 questions. The first one is a follow-up of the previous question. You talked about the equity gain amount. But from where did this gain come from? So I would like to know where this gain came from.

And my second question is on the subscription fee increase of TVING. I do remember that was somewhere around June that you saw a subscription fee increase. And in your previous answer you mentioned a loss decrease by about KRW 1 billion from the second quarter. And well, if this trend continues even with the write-off or discontinuation of the baseball season, well, do you think you would be able to reach a BEP point soon?

[Unknown Executive]

[Interpreted] Yes. A short answer to your first question. The equity method gain came from Netmarble Holdings. Now from TVING. [Interpreted] Yes. This is CEO, Cho from TVING addressing your question. Well, we've seen the number increase of our paying subscribers. We've also witnessed traffic increase and there was a subscription fee increase for new customers in the first half. And for our existing [Audio Gap] be an adjustment -- there have been an adjustment in June. And we've also seen improvements when it comes to our advertisement revenue, leading to a decrease in our operating loss numbers. And we believe that this trend will continue to be with which we could hope for a turnaround in the second half. [Interpreted] Next question please.

[Operator]

[Interpreted] The following question is by Choi Yong Hyun from KB Securities.

[Yong Hyun Choi, analyst]

[Interpreted] Yes, it seems certain that you will be seeing a strong turnaround still. But there continues to be an increase in your debt numbers. So going forward in the second half, how are you going to address this? And I believe that you have sold off some of your position in Netmarble Holdings. And with this amount, will you be servicing back your outstanding debt?

[Unknown Executive]

[Interpreted] Yes. This is Mr. Kim from finance once again addressing your question. Yes, in year '24, we will continue to work on our debt level, leading to a more healthier financial numbers. We will continue with this goal.

And as to the second part of your question, yes, we did use our Netmarble shares in servicing back our outstanding debt. And keeping a keen eye on the market conditions going forward, we will continue to securitize our noncore businesses.

And if you refer to the deck that we've given you, well, you'll see that our cash [indiscernible] number in Q2 has seen some adjustment as our debt number. And our net debt level remains the same. But you will be able to identify what kind of adjustment there have been made. [Interpreted] Next question please.

[Operator]

[Interpreted] The following question is by Korea Investment & Securities, Ahn Doyoung.

[Doyoung Ahn, analyst]

[Interpreted] Yes, I have a question for Fifth Season. I see that there were more deliveries in second quarter compared to the first one, but however [Audio Gap]. So why is it so? And will the delivery for the second half be on time?

[Unknown Executive]

[Interpreted] Yes. In the second quarter, Fifth Season were [Audio Gap] episodes for Severance and this has seen a little pushback to the third quarter. And starting January 17 next year, well, Severance 2 will air on Apple TV+. So delivery for the third quarter and fourth quarter.

Yes. In the second quarter, Fifth Season were [Audio Gap] episodes for Severance and this has seen a little pushback to the third quarter. And starting January 17 next year, well, Severance 2 will air on Apple TV+. So delivery for the third quarter and fourth quarter, I do not foresee any major issues outstanding.

And well the production and delivery situation, well, it's seeing normalization after the strike that took place. So in second half, we're seeing more or less of a normalization. And we are working in line with the change in content industry in the market. And as for the premium drama, well, we have plans for 8 deliveries this year and we believe that we could meet this goal. And we have some big titles, which we will be regaining in the distribution rights in the third quarter. And with this regained distribution right, we believe that we will be seeing more value add.

[Operator]

[Interpreted] The following question is by Choi Yong Hyun from KB Securities.

[Yong Hyun Choi, analyst]

[Interpreted] Yes. My question goes to Studio Dragon. I see that your growth is somewhat slowing and cash is piling. And well, would you seek for added growth through additional investments? Or would you focus more on profitability or perhaps shareholder return?

[Unknown Executive]

[Interpreted] Yes. This is [ Mr. Oh ] from Studio Dragon providing you with the answer. Well, the domestic market is seeing much of a rationalization and consolidation, if you would say. And for the domestic business, more focus will be on profitability. And well, we have our captive market, but we -- well, even within this captive market, down the road, we will be seeking more growth opportunities. And other than the existing global OTTs, we will also work on finding new OTT opportunities. And we have experience in joint planning and remakes in the U.S. and the Japanese market and we will be replicating our success in these markets in other regions. And for the time being, as was mentioned, we will be focusing on profitability, but we will be seeking additional growth from probably end of next year. And we're currently in a discussion with our new CEO to add more substance to our given plan. And if things are finalized, we will be communicating it through IR or other sessions.

[Operator]

[Interpreted] The following question is by Hyunji Lee from Eugene Investment Securities.

[Hyunji Lee, analyst]

[Interpreted] Yes. This is a question for TVING. While you've seen an improvement in the profit numbers, is it because the decrease in depreciation amount? Or is it simply because that you have seen an increase in paying subscribers? And in your last presentation, you told us that the subscribers who actually watch ads, they amount to about 20% of your overall subscriber bases. Does that number remain the same? And could you please elaborate more on your ad revenue?

[Unknown Executive]

[Interpreted] Yes, as was mentioned in the presentation, well, we've seen a very strong growth in the number of subscribers. On a Y-o-Y basis, the number grew by 30%. And the Q-o-Q numbers are also very strong, leading to an improvement in profit and also, of course, the bottom line.

And now on to the second part of your question, which was on ad watching viewers. Well, the number of ad watchers, they grow the fastest at about 30% to 40%. And if you look at the overall subscriber bases, they account for about 20%. And our ad revenue will, I believe, reach about KRW 10 billion, which would approximately be around 10% of our overall revenue. [Interpreted] Next question please.

[Operator]

[Interpreted] [Operator Instructions]

[Unknown Executive]

[Interpreted] [Audio Gap] no one else in the queue, this concludes the Q2 2024 earnings release session of CJ ENM. I thank you once again for the participation.

[Operator]

[Interpreted] This concludes the fiscal year 2024 second quarter earning results by CJ ENM. Thank you for your participation.

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