CJ ENM Co Ltd

KOSDAQ:035760

Earnings Call Transcript 2023-Q4

[Operator]

[Interpreted] 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 2023 Fourth Quarter Earnings Results by CJ ENM. [Operator Instructions]

Now, we shall commence the presentation on the fiscal year 2023 fourth quarter earnings results by CJ ENM.

[Kay Choi, executive]

[Interpreted] Good afternoon. This is Kay Choi, Head of IR CJ ENM. I would like to express my deep appreciation to all of our analysts joining us at our earnings call despite your busy schedules.

We will now begin our fourth quarter 2023 earnings conference call for CJ ENM. Please be advised that the financial results and business performance presented today are unaudited and may be subject to change upon review by an independent auditor.

So today, we are joined by our CFO, Mr. Hwang Deuk-su; and the heads of the respective division; Mr. Hong Ki-Sung, Head of Media Platform; Mr. Koo Chang-gun, Head of Film & Drama; Mr. Sim Joon-beom, Head of Music; Mr. [indiscernible], Head of Commerce; Ms. Kim Jey-hyun, CEO of Studio Dragon; Ms. Choi Joo-hee, CEO of TVING; Mr. Ha Yong-soo, CEO of CJ ENM Studios; and Mr. Steve Chung, Head of our Global business.

We will now begin with the presentation by the CFO on our business plan and objectives.

[Deuk-su Hwang, executive]

[Interpreted] Good afternoon. This is Hwang Deuk-su, CFO of CJ ENM. In 2024, CJ ENM's goal is to achieve a full-fledged turnaround. We will strengthen the profitability of our core subsidiaries for a turnaround of company-wide profit as a start. We'll continue to improve free cash flow and also by securing strategic divestment of non-operating investment assets, we plan on reducing net borrowings while further strengthening our financial soundness.

In 2023, we enhanced operational efficiency and sustainability through process restructuring and structural improvements. As a result, we have seen the impact of a turnaround and improved profitability starting in the second half of last year. Building on this momentum, we will achieve even stronger earnings growth in 2024.

TVING, which has surpassed 4 million paid subscribers to date, will continue to drive traffic expansion as we introduce an advertising model this year. We are targeting MAU of 10 million or more and improvement in our margin profile. For our Music business, we have a new group set to debut in April, and we plan on further expansion of global sales by strengthening our A&R and artist management business.

FIFTH SEASON will be ramping up growth, producing and distributing more than 25 titles this year centered around its premium series portfolio. For Commerce, we will be advancing our One Platform strategy while strengthening mobile live commerce, leveraging the competitive strength of our brand.

The market environment this year is also expected to continue to see many changes and challenges, but we will focus on the core competencies of each business to achieve greater synergies. CJ ENM is building on the success of our domestic business and expanding our presence overseas as we continue to grow our global entertainment business, driven by our overwhelming competitiveness in content production and differentiated distribution.

I would like to wish all of our shareholders and analysts, the best of good health and peace in 2024. Thank you.

[Kay Choi, executive]

[Interpreted] Next, we will move on to our financial results. Please be reminded that CJ ENM's quarterly and full year financial statements are consolidated results based on K-IFRS. Year-on-year comparisons are based on our pro forma financials and operating profit for the respective business include internal transactions.

We will now report on our company-wide business performance for Q4 2023.

[Seong-Ho Jang, executive]

[Interpreted] Yes. This is Jang Seong-Ho, Head of Finance. Our fourth quarter consolidated revenue was KRW 1,259.6 billion, down 14% year-on-year. Operating profit, however, continued to turn around, posting KRW 58.7 billion from improved earnings from subsidiaries. We recorded full year 2023 revenue of KRW 4,368.4 billion and an operating loss of KRW 14.6 billion. Net loss for the full year was KRW 399.6 billion due to an increase in one-off non-operating costs in the fourth quarter.

The Entertainment business turned around to profit in the fourth quarter, recording operating profit of KRW 32.7 billion on KRW 883.9 billion in revenue. We saw an improvement in profitability despite poor performance from TV advertising, thanks to an increase in TVING content sales. FIFTH SEASON continued to deliver TV drama series, films and documentaries, recording a turnaround and operating profit of KRW 19.4 billion.

Our Music business posted a record high operating profit by expanding album and content sales for ZEROBASEONE and JO1. Commerce continued to improve on profitability, recording operating profit of KRW 26 billion on KRW 375.7 billion in revenue, thanks to recovery in TV GMV and growth in mobile live commerce. Please refer to the slides for further details.

[Kay Choi, executive]

[Interpreted] And we'll move on to the presentation by Studio Dragon.

[Jey-hyun Kim, executive]

[Interpreted] Good afternoon. This is Kim Jey-hyun, CEO of Studio Dragon. I will take you through our 2023 full year and fourth quarter business performance.

For full year 2023, we managed to overcome unfavorable media environment, achieving 23.1% growth in our overseas sales revenue. Revenue was KRW 753.1 billion, up 7.9% year-on-year. Operating profit was KRW 55.9 billion, down 14.3% year-on-year from low TV viewership.

In the fourth quarter, we recorded revenue of KRW 161.1 billion, down 15% year-on-year due to a lineup decrease of 30 episodes and the absence of large-scale OTT originals.

Although we did record an operating loss of KRW 3.8 billion due to weaker-than-expected library sales and tearing down of the movie set for the Arthdal Chronicles. However, when setting out the one-off cost factors, we were able to maintain solid fundamentals as a production powerhouse.

2024 will be a year of transition for our studio model, and we will be focusing on improving our profitability.

After going public, Studio Dragon has established itself as a global leader in the industry by focusing on building up more references and growing our revenue. However, profitability-wise, we were not able to meet certain expectations.

Going forward, we intend to focus on improving our profitability as we focus on the 3 following directions: first, strengthening in-house development and production; second, efficient portfolio management; and third, global expansion focused on non-captive business.

So far, we are off to a good start with Marry My Husband, Captivating the King, both have become global hits, and we expect to carry forward this solid momentum with our 2024 lineup, including works like Queen of Tears. 2024 will be the starting point for a big change in our content and business strategy.

Thank you.

[Kay Choi, executive]

[Interpreted] Thank you. Next, we will move on to the Q&A. Because of the time, we ask that you limit yourself to no more than 3 questions per person.

[Operator]

[Interpreted] [Operator Instructions]

The first question will be given by Kim Hoi Jae from Daishin Securities.

[H.J. Kim, analyst]

[Interpreted] Yes, let me ask some questions. First, regarding TVING. It seems that, as of the fourth quarter, you have passed the 4 million mark in [Technical Difficulty] subscribers. So could you provide further details in terms of your subscriber base and actual performance for TVING? And I understand that there has been some talk of a possible merger with Wavve. So that's not with [Technical Difficulty] could you elaborate on your guidance in terms of subscriber base 2024? And is your previous guidance of being able to reach BEP by the end of 2024 on a quarterly basis, is that still intact?

The second question has to do with FIFTH SEASON. In the fourth quarter, you recorded operating profit of KRW 19.4 billion. So how many titles were delivered for that quarter? And you said that you're expecting more than 25 titles in 2025. If you do simple math, that comes down to above BEP level on a quarterly basis. So if you don't mind, if you could provide further guidance on the expected performance?

And third question regarding Dragon Studio, I think it's -- on one of the slides regarding strategy. I think you said you're going to focus on margin improvement and somewhere it says platform strategy plus volume. So could you elaborate on what that would mean?

[Deuk-su Hwang, executive]

[Interpreted] Yes, let me share the revenue and operating profit and loss for TVING and FIFTH SEASON before pass it on to the heads of the different department -- divisions to elaborate. In the fourth quarter, TVING revenue was KRW 99.9 billion with an operating loss of KRW 22.8 billion. For FIFTH SEASON, fourth quarter revenue was KRW 158.9 billion, with operating profit of KRW 19.4 billion.

[Joo-hee Choi, executive]

[Interpreted] Yes. I'm CEO of TVING. Let me take your question on the TVING subscriber base and breakeven prospects. So we actually did a price increase effective as of December 1. But that notwithstanding on the strength of our very competitive content, we have continued to see a rise in the number of subscribers. So A Bloody Lucky Day or Death's Game or EXchange 2, many of these original works actually are standout hits. Also, a lot of the content that has been airing on tvN have done very well despite the price increase. And again, we continue to see a rise in subscribers, and we're now past the 4 million mark, and we think we are on good track to achieve 5 million within the second half of this year.

In terms of our breakeven goals, we do expect to see breakeven starting in the second half of this year, again, in spite of the price markup. Again, the key drivers will be the continued increase in our subscriber base and also lower attrition amongst existing subscribers. Also, we will be launching the AVOD model as of March this year to ramp up our advertising business and by expansion of our BM, we expect to see top line growth in the second half. Also, we will be improving the efficiency of original content payment structure, which will also contribute to improved bottom line. So overall, we do expect to break even within the second half of this year.

[Kay Choi, executive]

[Interpreted] And then now on to FIFTH SEASON.

[Steve Chung, executive]

[Interpreted] Yes. This is Steve Chung, Head of the Global Business. I think it's been quite a long while since I've been able to make any positive comments about performance from FIFTH SEASON. So I'm very glad that I can do this today.

You asked about how many titles were delivered in the fourth quarter? So it's a total of 4, including TV, film and documentary. And so, as the Hollywood strike actually was finished in the fourth quarter, we have seen normalization starts in the fourth quarter, driving good performance. Although I cannot provide full year guidance for 2024. I will say that since the Hollywood production system is now on its way to becoming -- going back to normal, the titles that were put off and postponed last year should come through and be delivered within this year.

You asked about achieving quarterly breakeven. Of course, we will do our very best to achieve that. But actually, we recognize revenue and profit upon delivery. And sometimes, it may not be best to look at it in very short term in quarter increment necessarily because delivery, for example, could be late March or early April. So there can be that kind of variance. So I think it's best given the overall production system to look at it from a long-term full year perspective. While it is true that the overall global environment for our industry is in the state of confusion and chaos. Nonetheless, we believe that for FIFTH SEASON, the strategy of focusing on premium content is well suited, and we intend to maintain that kind of strategic view.

Our goal for title deliveries in 2024 is 25. So this will include TV series, TV titles, documentary and film. And all of the different genre TV titles in particular, tends to have a greater contribution to revenue and profit in relative terms. So although the number of titles itself is also a meaningful metric, we want to focus more on the scale of revenue and more importantly, the scale of profits rather than the exact title number.

And third, regarding FIFTH SEASON, we do want to diversify its line of business away not just around TV production delivery, but into distribution and film as well, to evolve more in a commercial sense and release more popular mass titles as well. So that is currently underway. So we are fully aligned with members of management that we will be focused on profitability this year, enforcing tight cost discipline to drive for sustainable growth. And hopefully, and we will do our best to continue to deliver good results to you throughout 2024.

[Kay Choi, executive]

[Interpreted] Now, from Studio Dragon...

[Jey-hyun Kim, executive]

[Interpreted] Yes. So you asked about what the plus alpha part of our platform strategy means. Well, up to now, I think we have been mostly focused on stable supply of previous contractual committed volume in terms of original and non-captive business mostly. But we want to incorporate more customized approaches going forward to suit the different characteristics of different platforms and by introducing advanced or preemptive pitching as an example. So for certain titles, we could introduce bidding, not working just with the major global distributing partners for originals. But broadening the scope of our partnerships with more local and regional partners as well. So we are in the process of exploring these types of new distribution models.

[Operator]

[Interpreted] Currently, there are no participants with question. [Operator Instructions]

The following question is by Lee Ki-hoon from Hana Securities.

[Ki-hoon Lee, analyst]

[Interpreted] Yes. I will be asking 3 questions. Well, it seems -- I asked the same question in the third quarter. But this time around, I think labor cost has gone down again by about KRW 10 billion. Compared to the second quarter, it's down by KRW 40 billion. So why is that? Is it because you have removed certain incentive payments? Or has there been a real reduction in your headcount? So if you can provide some guidance for full year 2024 in terms of the labor costs and human resources? I'd appreciate it because it does seem to be a substantial decrease in cost.

Second question on TVING. So we're hearing a lot of good feedback from many global companies also which have introduced ad tier plans. So you heard -- we heard about your goal of 10 million MAU. But otherwise, what are your expectations for the performance of the ad tier subscription model? And I think you did very well to earn the KBO [Technical Difficulty] rights, although you may have overtaken a little bit, but could you comment on that? And when you include those costs in total TV production cost, do you think you will still be able to maintain a flat cost relative to last year?

And the third question is regarding divestments of your non-operating assets, which you did emphasize. So has anything become more visible? Are there any major things that we should be on the lookout for comments?

[Deuk-su Hwang, executive]

[Interpreted] Yes. Regarding your question for labor costs, so in the fourth quarter, we did not see any major change in our headcount versus the third quarter, but there have been continuous efficiency gains in our headcount throughout 2023. However, as of fourth quarter, it's not that we engaged in any kind of artificial restructuring. Reduction in labor cost mostly comes from reduced performance at the end of the year, which led to reduced incentive payments. So that was more temporary. It's hard to provide an accurate guidance for full year '24 on labor costs, but the basic directionality is to maintain the current level of labor costs, which have become more efficient throughout last year.

So let me explain more about the production budget before moving on to the second question. So, obviously, in the media industry, there's very -- there are a lot of broad changes in terms of the intensity of competition and lots of changes sweeping to the industry. And there are differentiated programming strategies that we wish to engage in, given the fragmented industry. So let me just provide you some color in terms of our production budget for the year, dividing into channel, TV and non-captive, although we cannot make a very strict distinction between the 3 categories as before. But across those 3 categories, on a full year basis, the total production budget for this year is KRW 850 billion, which would be similar to last year's level. This does not include FIFTH SEASON. For channel, when you consider the amortization cost for intangible assets and non-scripted expenses, it's KRW 550 billion up and down. For TVING, it's about KRW 150 billion up and down, for non-captive, another KRW 150 billion. So combined, as a total is KRW 850 billion.

[Joo-hee Choi, executive]

[Interpreted] So let me take your 2 questions regarding TVING. So, as you know, we intend to start our AVOD business model as of March this year with a subscription fee of KRW 5,500. And actually, we will start exclusive broadcasting of professional KBO games. There's a friendly match on March 9, which will tie in nicely and delivering good synergies, and it's a good driver to boost our advertising business in our opinion. So when you look at AVOD, even when you have -- you apply conservative assumptions, we're expecting that AVOD coverage will be 20% to 30% of our subscriber base with about 10% upside in revenue. So those are our expectations at the moment.

And you asked about overall content expenses, including cost per KBO. Well, actually, we have engaged in different efficiency gain initiatives to restructure the contractual structure of our licensing and other sourcing. And so, even when including the KBO costs, we expect our original content costs to remain flat versus last year.

[Ki-hoon Lee, analyst]

[Interpreted] And regarding the third question.

[Deuk-su Hwang, executive]

[Interpreted] Yes. So for the purpose of better financial soundness, last year, we did continue divestiture of certain non-operating assets. And so, just to provide some numbers in terms of results. Well, actually, as a result of the sale of our debt ratio as of the end of 2023 came down to 139%, bringing it close to the level achieved in late 2022. Our net borrowings also were around KRW 2 trillion, which is down by about KRW 110 billion from the previous year. So although on a full year basis, last year, our P&L performance was poor. However, we were able to still improve our financial soundness through disposal of these assets and also by attracting investment as well. So, again, although cash flow was not positive, we did manage to improve on our gearing ratio and reduce our net borrowings.

In 2024, well, we do have certain non-operating assets left over from last year, which we consider for disposal, but do not execute on yet. And so, we will observe the market developments and see as we go, as we continue to work to improve the financial structure of our business and try to solidify a stronger base for our growth.

[Operator]

[Interpreted] Currently, there are no participants with question. [Operator Instructions]

The following question is by Hwang Sung Jin from Heungkuk Securities.

[Sung Jin Hwang, analyst]

[Interpreted] Yes. I will be asking just a very simple question on Toho. So I understand that after you took part in the capital increase in December for Toho, there was some goodwill write-off. Or what is the situation in terms of the goodwill on that?

[Steve Chung, executive]

[Interpreted] As you know, FIFTH SEASON was successful in attracting investments from Toho. And so, Toho made a [ cue ] equity investment of $225 million for a 25% interest in FIFTH SEASON. It happens that relative to our initial acquisition value, the valuation for that deal actually went down by 20%, 25% or 30%. So we did have to recognize an impairment loss on the goodwill that we had previously recognized on our consolidated financials. And the amount that was recognized in the fourth quarter was KRW 95 billion.

[Operator]

[Interpreted] The following question is by Park Seong Guk from Kyobo Securities.

[Seong Guk Park, analyst]

[Interpreted] Yes. I would like to ask a few questions regarding Studio Dragon. I think the 24 lineup for contents that will be aired on tvN, a lot of it has already been released or shared. So if you look at some of the titles like Resident Playbook, it seems that -- it's not a Studio Dragon, that is involved by ENM Studio that is involved in development planning. So could that possibly have a negative impact on Studio Dragon's performance? If that is the case, will your focus be on driving non-captive revenue versus trying to focus more on tvN captive revenue?

[Jey-hyun Kim, executive]

[Interpreted] Yes. So it is -- you are right that Resident Playbook is not produced by Studio Dragon, but it's not that this is a big change from before because previously there were response [indiscernible] these other titles that were included on ENM lineup, not ours. Strategy wise, we are looking to expand both into the non-captive space. You're right, as there is a bit of a -- and overall, there's a bit of a decline in the TV lineup. So the goal is to have 50% of our lineup be on the non-captive side. And so, we are looking proactively to boost that share to different types of distribution strategies, including bundling or preemptive pitching to expand that non-captive base.

[Operator]

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

[Yong Hyun Choi, analyst]

[Interpreted] Yes. So I have a question on TVING and then a company-wide question as well. So it seems for TVING, on the original content, there's a linkage between the original content and the viewership. So maybe we can look at those content expenses as a variable cost. And that said, given your subscriber base assumption, isn't it a bit too aggressive to expect to be able to achieve breakeven in the timeline that I think you mentioned? And also, I think you said to improve bottom line, there have been improvements to the underlying contractual terms or structure. So if that's correct, could you elaborate?

And then for a company-wide question, you said you intend to improve free cash flow. So could you give us more color in terms of how much of an improvement you expect this year?

[Joo-hee Choi, executive]

[Interpreted] So let me take your question regarding TVING. So, in a given year, we would create maybe 15 to 20 original content titles. Even if we see an increase in subscribers, that does not mean that we will increase that line up to 30% or 40% because of a larger subscriber base. You asked, whether we look at it as a variable cost. But actually, we look at it to be much closer to a fixed cost.

And in terms of improvements to the contractual structure, so for any inefficient content, we will continue to make year-round efforts to make the terms and conditions more efficient and also we'll work to expand the IP content for original content as well. So maybe a secret [indiscernible]. This is a title from -- originally from ENM, but we made Dongjae, The Good Or The Bastard a spin-off, which actually ended up being much more efficient. So that kind of approach.

[Deuk-su Hwang, executive]

[Interpreted] Yes. Let me take your question regarding improvements to our free cash flow. So the 2 major components, termed as free cash flows as our CapEx and operating cash flow. So let me explain on those 2 components. First, for CapEx, with the exception of very important pressing CapEx needs throughout 2022 and '23, we have not been executing on CapEx or we've also been postponing the expenditure as we enforce very tight discipline, and this stance will continue into 2024.

In terms of operating cash flow, obviously, for any business to expand also grow its top line, there will be investments that is required. And for us, that would be investments into content. However, there can be some issues arising with certain content investments. Sometimes there are delays against the normal schedule and sometimes in terms of the payback, there might be an issue. But we will continue our efforts from last year to tightly manage our content assets to minimize any possibility of a deficit having a negative impact on our free cash flow. So this stance will continue into '24 as we remain very committed to achieving profit.

[Yong Hyun Choi, analyst]

[Interpreted] Yes, I have just one last question. In terms of the content production expense, full year expense for TVING, if you could break it down into original versus non-original content? What would be the split or the mix?

[Joo-hee Choi, executive]

[Interpreted] So roughly half-half.

[Kay Choi, executive]

[Interpreted] So since there are no further questions on queue, I think we can conclude our third quarter 2023 earnings call for CJ ENM. I know there are many calls today. So thank you very much for coming despite your very busy schedule. I'd like to wish everybody a very happy New Year holiday. That will conclude our earnings call. Thank you.

[Operator]

[Interpreted] This concludes the fiscal year 2023 fourth quarter earnings 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.]