CJ ENM Co Ltd

KOSDAQ:035760

Earnings Call Transcript 2023-Q3

[Operator]

[Interpreted] Good morning, and good evening. First of all, thank you all for joining the conference call, and now we'll begin the conference of the fiscal year 2023 third quarter earnings result 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 first -- on the fiscal year 2023 third quarter earnings results by CJ ENM.

[Kay Choi, executive]

[Interpreted] Good afternoon. This is Kay Choi from CJ ENM IR team. I thank the shareholders and analysts for their participation despite your busy schedules.

Now we will begin the earnings presentation for Q3 2023 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 that review.

Today, we have here with our CFO, Deuk-su Hwang and heads of different business divisions. From Media Platform, we have Ki-Sung Hong; from Film& Drama, Chang Gun Koo; from Music, [indiscernible] and from Commerce, we have [indiscernible]. From Studio Dragon, we have CFO, [indiscernible] from TVING, we have CFO, [indiscernible]. CJ's Studio CEO, [ Jon Suha ] is also with us as well as Steve Chung from Global Business.

First, CFO, Deuk-su Hwang, will go over major results and business strategies.

[Deuk-su Hwang, executive]

[Interpreted] Good afternoon. This is CFO Deuk-su Hwang. Despite the difficult market conditions home and abroad, CJ ENM began a profit turnaround with positive operating profits in Q3. Our revenue recorded [ KRW 1.1109 trillion ] with operating profit of KRW 7.4 billion. TVING and FIFTH SEASON's profit improvement led profit recovery for entertainment despite the stagnant advertisement and pictures business. Commerce business also defended itself against market headwind of a low season with brand differentiation such as fashion vertical strategy.

With strongly driven midterm strategy, the company is planning to focus on business growth and profitability improvement. We will continue to strengthen premium content such as non-scripted entertainment and drama and enhance profitability with expanded global distribution. With subscription format review and ad-based AVOD introduction, TVING will add diversity to [Audio Gap]. It will further grow into a more competitive platform with stronger originals and library. The market shutdown situation is easing for this season. And with that, the business will focus on content delivery with product normalization -- production normalization.

Management success, as illustrated with ZEROBASEONE and AR business, will further enhance our Music business. Music will see earnest growth with expansion of global market bound in-house audits, production and concepts. I thank the shareholders and analysts for your support during an adverse environment. Thank you.

Next will be the results presentation. quarterly and yearly results are mainly based on K-IFRS consolidated numbers. Y-o-Ys are on a pro forma basis and the divisional operating profit numbers include internal transactions. Now we will begin the third quarter [ earnings ] release for CJ ENM.

[Unknown Executive]

[Interpreted] Good afternoon. This is [ Hanmu Pang ] from Finance. Entertainment in Q3 realized a turnaround with revenue of KRW 810.5 billion and an operating profit of KRW 300 million. Despite the sluggish ad market, Media Platform saw a profit improvement based on TVING paying subscriber and traffic growth. The box office was sluggish, but pictures continued its oversee sales fast growth with expanded global distribution. ZEROBASEONE's debut was a success, recording a [ double million seller ] leading global live sales growth. Revenue from Commerce stood at KRW 300.3 billion, which is a slight decrease of 2.9% Y-o-Y, but its operating profit grew 23.2% at KRW 7.1 billion. The profitability was well defended with portfolio strengthening strategy focusing on big brands.

Global revenue will continue to see a growth based on content and artist competitiveness in Q4 and further add to profit improvements. Commerce will also concentrate on profitability recovery [Audio Gap] fall/winter high season effect led by fashion brand. Please refer to the document for further details. Thank you.

Now we will be hearing from Studio Dragon.

[Kim Jey-hyun, executive]

[Interpreted] Good afternoon. This is CEO, Jey-hyun Kim from Studio Dragon. I will go over the management results of Q3 year 2023. Revenue decreased 5% Y-o-Y at KRW 217.4 billion. Global OTT original sales increased 40.8% Y-o-Y and overseas sales increased 8.9% during the same period, recording the highest overseas revenue number ever.

Operating profit grew 15.4% Y-o-Y at KRW 21.9 billion, and the company successfully transitioned its major profit source to the global market. The company will enhance its global reference in Q4 with focus on TV and also OTT drama hit ratio improvement.

TV content viewership concerns will be disposed starting with Castaway Diva. Studio Dragon will cement its position in the global stage with original meta titles such as Sweet Home2 and Gyeongseong Creature. Thank you.

[Deuk-su Hwang, executive]

[Interpreted] Now we will be entertaining your questions. In consideration of time limits, please focus on core issues. And we would appreciate it if you limit your questions to 2 each.

[Operator]

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

[H.J. Kim, analyst]

[Interpreted] Yes, I have 2 questions. First question goes to TVING. You have introduced some changes to your subscriber scheme and also introduced the AVOD system. And it was market's expectation that your subscriber bases would reach somewhere around 4 million by the end of this year and go up to 5 million in year '24. And the market expected that with that amount of subscriber base, the company would reach a [ BEP ]. But with your introduced strategic changes with this outlook change, could you please give us a guidance as to when you expect to see a breakeven point?

And the second question goes to Studio Dragon. Could you please give us an update on your overseas project? And you've given us a number of 17% of overseas revenue contribution in the third quarter. Do you think this level of overseas contribution is sustainable? Or is it a one-off thing? Could you please give us the directionality?

[Choi Ju-hui, executive]

[Interpreted] Yes, I will address your question for TVING. This is CEO Ju-hui Choi speaking. Well, by the end of this year, we do expect to see a 4 million strong subscriber bases, which is a 50% growth over the previous year. And while we are seeing a little bit later realization of our breakeven point because the number of subscribers grew. Majorly thanks to our alliance partners. And with that, ARPU was relatively lower. And our original content did not really meet our expectations. But going forward, as was mentioned in our presentation, we will be introducing new ad schemes, which will enrich our profit sources and we are also going to introduce the AVOD system. So with that, in the second half of next year, we do believe to reach a breakeven point.

[Deuk-su Hwang, executive]

[Interpreted] Now we will be hearing the answer for Studio Dragon.

[Unknown Executive]

[Interpreted] Yes, now, this is the answer provided by Studio Dragon on our global projects. Well, we do believe a pilot order will soon be coming from Amazon. As you're well aware, the [indiscernible] strike in the U.S. has somewhat influenced our project. But with that coming to closure, we do believe that this order -- pilot order will soon be back on track. And we also have plans for the participation of top Korean creators directly into projects. I cannot give you any [ time information ] as of today, but we have certainly set up plans for that. And with that, we would be seeing a continuation of our overseas contribution to our overall revenue numbers.

We are maintaining our good relationship with existing global streaming companies. On top of that, we have gotten excellent results with the local and regional platform players. And that has been reflected in our revenue numbers, leading to a higher contribution from our overseas businesses. And we believe the directionality will be maintaining going forward because we will be maintaining our position when it comes to our global businesses.

[Operator]

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

[Eun Shin, analyst]

[Interpreted] Yes. My first question goes to TVING. [Audio Gap] Well, I see that the operating numbers are better than expectation. And do you think this is a sustainable level going forward? So what is your expectation for the operating numbers in Q4 and year '24 as a whole? My second question, specifically for FIFTH SEASON. What was the number of delivery in Q3 and also in Q4? Could you give us a yearly guidance for year '24 as well?

[Deuk-su Hwang, executive]

[Interpreted] Yes, I will give you a general answer when it comes to our operating numbers and I will then ask the department heads to give more color on the department works.

So I will give you numbers of TVING and FIFTH SEASON revenue. For TVING, it was at KRW 78.0 billion with operating numbers of KRW 31.2 billion. That for FIFTH SEASON is at KRW 97.4 billion with KRW 12.3 billion operating numbers.

And on a Q-o-Q basis, the loss decreased by KRW 37 billion leading to a turnaround. For divisional information, I will ask the division heads.

[Choi Ju-hui, executive]

[Interpreted] Yes, for TVING, would we be able to sustain our operating numbers going forward. Well, as of now, the subscriber scheme will change, and change will be reflected in earnest starting December. So the new subscribers, they will be going by the new payment scheme or the new subscription scheme. And the price increase will also apply to our existing customers starting Q1 year 2024. And as was mentioned, we will be introducing AVOD, which will lead to advertisement profit. And through that, we will be seeing an overall profitability improvement for our business. So yes, on a quarterly basis, we do believe that this positive turn is sustainable.

[Unknown Executive]

[Interpreted] Yes. Now this is the answer provided by FIFTH SEASON. Now you've asked on Q3 delivery and our expectation for Q4 delivery. Well, as you're well aware, the strike in the U.S. has been continuing for more than 6 months, leading to production disruptions and even stoppage. And well, with this situation in place, the number of titles delivered was not really to our expectation. But as was mentioned in the presentation, we did see a turnaround in Q3. It's about the delivery -- well, they're not canceled, [ they will be ] delayed. The projects that have been contracted, it's not canceled but delayed. And in Q3, there was a delivery to a TV format, Life & Beth Season 2, and there was one movie title delivery [indiscernible]. It was in the box office briefly, and then it was aired on Apple TV. The airing was done already in September. So that was supplied to the theaters and Apple TV. And there was one documentary delivery titled Superpower. It's on Zelensky directed by Sean Penn. It was delivered to Paramount+.

And in Q4, what is our outlook or guidance for Q4? Well, the Screen Actors Guild strike, it's still an ongoing thing, but we are cautiously optimistic given despite the ongoing strike. Well, I cautiously believe that the strike could be over even this week. So that's a possibility. It could be over this week. And as to the detailed delivery dates, well we would see more clearly when the Screen Actors Guild strike is over. But if you look at our revenue structure, well, of course, delivery to TV takes up for the majority of our revenue structure, but we have successfully diversified our efforts. So we have our documentary business plus the pictures business. We have strategically invested in studios outside the U.S.

So there are some studios that we own that does production outside the U.S. And with that, it's not really influenced by the U.S. strike. And we work with our own title plus we get titles from third party and engage in a distribution business with the supply titles.

Services diversification, I think we are okay. So as today, I cannot give you a more detailed guidance number as for Q4, but the improvement that we have witnessed in Q3 is not a one-off thing. I think this is a sustainable thing. I have a cautiously optimistic view on the outlook for Q4. And I do believe that it will continue into next year as well.

Of course, on a monthly basis, there will be some ups and downs when it comes to our delivery title numbers. But once again, the titles that were contracted, they have not been canceled. The contract remains alive. It's just a delaying of the delivery date. So with that, I would once again reiterate my cautious optimism for year '24.

[Operator]

[Interpreted] The following question is by [ Kim DongJun ] from CLSA.

[Unknown Analyst]

[Interpreted] Yes, I have 2 questions. The first question goes to TVING. Well, it's on your content investment for next year and in the coming 2, 3 years. Would you take a more conservative stance? Or would you increase your investment in content? So this was my question to TVING. And my second question goes to Studio Dragon. Your results in Q3 is quite optimistic. But I do believe the numbers include the results for big door price, too. So my question is, well, does your numbers include and already reflect what would be delivered in Q4?

[Deuk-su Hwang, executive]

[Interpreted] Yes. Now on our investment outlook. Well, this year, we spent more or less what we have spent last year. And we do believe that we would be spending more or less a similar amount going into next year. And you've asked about our 2 to 3 years investment outlook. Well, with accelerated turnaround, there will be more need for quality content.

[Unknown Executive]

[Interpreted] Yes. Well, the numbers that we have presented today does include some episode delivery on [indiscernible] season 2 and also to [indiscernible] season 2, but it's not a full reflection of the series. The reflected episode in numbers less than 5.

[Operator]

[Interpreted] [Operator Instructions] The following question is by [ Eee Ki-hun from Hana Assets and Management ].

[Unknown Analyst]

[Interpreted] Yes. I have 2 questions. First is on labor. I see that your results were pretty much helped by the decrease in labor cost. I see a decrease by approximately KRW 30 billion. Is it a decrease due to an actual head count decrease? Or is it because the non-incentive payment? So would this continue going into the future? This is my first question.

And my second question is on your restructuring. You have sold your stake at Belift Lab and there are talks in the market that you'll be working on your Netmarble stakes. But even if you sell these stake holdings, I don't think it will be enough to cover your interest spending. So do you have any other measures that you're thinking of?

[Deuk-su Hwang, executive]

[Interpreted] Yes. First, on the labor cost question. Well, I'll give you the headcount as of March end year 2023 and also the numbers for end of September. Well, at the end of March this year, there were 220 people working in entertainment. The number decreased to 1,990 people at the end of September. So that's roughly about 10% headcount decrease. And on the incentive nonpayment question, there will be slight adjustments by the end of this year when it comes to our incentives.

Yes. Now on to your second question, yes, we did divest our Belift Lab holdings and the process is complete now. We fetched about KRW 150 billion with the sales leading to a lower leverage ratio, but that was not for the improvement of financial. It was more to do with our business strategy. And as was communicated to the market, we are working on divesting noncore assets, and we are ready to divest off any noncore assets. But as to specific names, please understand that I am not at liberty to discuss on any specific names.

[Operator]

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

[Yong Hyun Choi, analyst]

[Interpreted] Yes, I have got 2 questions for TVING. The first is to do with your Naver bundled offering. Well, because you have this bundled offering with Naver, I don't think the introduction of AVOD would lead to an added merit. So I would like to hear your opinion on that. And well, with AVOD, what is your respective penetration?

[Deuk-su Hwang, executive]

[Interpreted] Yes, it's true that we do have one of a lighter payment scheme customers with our bundled offering, leading to a lower ARPU numbers. As was mentioned in the presentation and in my previous answers, we are waiting a transition to a AVOD scheme. And with that, our expected penetration rate stands at somewhere around 40% to 50%.

[Yong Hyun Choi, analyst]

[Interpreted] I guess my next question is related to your telco bundled offerings. Would you be introducing AVOD to those types of bundled offerings as well?

[Unknown Executive]

[Interpreted] Yes, for the lower size schemes, well, we are going to introduce the AVO models. For the higher price standard and premium, it won't be with [ any of us ].

[Operator]

[Interpreted] [Operator Instructions]

[Unknown Executive]

[Interpreted] Since there are no other questions, we'll be ending Q3 2023 earnings release by CJ ENM. Thank you.

[Operator]

[Interpreted] This concludes the fiscal year 2023 Third Quarter Earnings Results by CJ ENM. Thanks for the participation.

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