CJ ENM CO., Ltd. (A035760) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is [ Kay Che ] from CJ ENM's IR team. I thank the shareholders and analysts for taking part in this earnings session despite your very busy schedules. Now we will begin the earnings release session of CJ ENM for Q4 2020. Please note that the management and financial results presented today have yet to undergo an independent auditor's review and could be subject to changes upon such review. Today here with us is CEO, Ho-Sung Kang and Deputy President, [indiscernible]; and heads of various Business divisions. So our EVP and CFO, Chun Kyu Park is here as well as EVP, [Hu Gyeong Lee ]. From IT Content division, we have Mr. [ Myeong Han Lee ] and the IT Distribution [indiscernible]. And from [ C Solution ], we have [indiscernible]; from Commerce, [indiscernible]. And from pictures, we have [indiscernible]; from music [indiscernible]. And from Studio Dragon, we have 2 CEOs here with us, they being Chul-Gu Kang and [indiscernible]. And we have CEO [indiscernible] from Live City and CEO from TVING, Ji-Eul Yang. First CEO Kang will present on management plans for 2021.

[Interpreted] Good afternoon. This is CEO Ho-Sung Kang of CJ ENM. I wish for you and your family health in the new year. CJ ENM [indiscernible] for an even healthier year in 2021. We will enhance the true growth of our entertainment and commerce businesses and focus on restoring shareholder value. First, the company will expand production for not only traditional content, but also digital content in diverse genres for different platforms. We will value up our contents and lead the change for the coming decade. Commerce too will continue its TV products and [ batch ] strategy and optimize itself for digital and mobile commerce. 2021 will mark the earnest beginning of digital transformation for all our businesses. Along with digital innovation, content production capabilities, TV competitiveness and global competitiveness enhancement will be our 4 major [indiscernible]. Through specialized studio structure, we will extend the lifetime value of content and enhance competitiveness in overseas market, including U.S., Japan and China. By securing the best talent and with business structure innovation, the company will maximize its merits as a content commerce company. We will also do our best to enhance shareholder value. We will listen to the questions and opinions of the shareholders and address them. The company will take stronger environmental responsibility in content and commerce businesses. And as a corporate member of society, we are working on detailed measures to ensure ESG management. [indiscernible] cash dividend of KRW 1,600 per share totaling KRW 33.1 billion. For year 2021, it is our goal to deliver a payout ratio of 15% to our shareholders. We will grow with our shareholders as a representative content player in [indiscernible]. content company [indiscernible] market. I sincerely thank the shareholders and analysts in concluding my remarks. Thank you. Now on results presentation. [indiscernible] and yearly results are based on [indiscernible] by comparisons are also on a pro forma basis.

[Interpreted] Good afternoon. This is [indiscernible] of CJ ENM. The consolidated [indiscernible] stood at [indiscernible]. Operating profit recorded KRW 87.9 billion, which is an increase by 106% over the same period, continuing the company's turnaround trends. There were difficulties in the TV ads [indiscernible] and [indiscernible] market due to the ongoing COVID-19 situation, but our yearly revenue continues to be steady at KRW 3.3912 trillion. Revenue decreased by 10.5% over the previous year, but thanks to the profitability improvement of media and commerce, operating profit recorded KRW 272.1 billion with OP margin of 8%. In year 2021, the company will continue to maximize lifetime value of content and commerce business. We will focus on increasing the number of TV subscribers and enhancing digital platforms. For commerce, we will continue to strengthen high profit product portfolio and expand digital GMV by fortifying platform. Page 5. Media revenue for 2020 was at KRW 1.5907 trillion, which is a 5.2% decrease Y-o-Y. However, operating profit increased 40.8% at KRW 99.9 billion. In particular, with strong viewership in Q4 with titles such as The Uncanny Encounter, New Journey to the West 8 and Show Me the Money 9, TV ad revenue grew 7.7%, leading profit turnaround. Paying TV subscribers grew exponentially at 50.3% Y-o-Y, and digital revenue continued its steep growth at 57.5%, giving the company the best ever quarterly operating profit numbers. The company has highly anticipated dramas such as Vincenzo, Hospital Playlist 2 and Jirisan lined up for 2021 and is also focusing on strengthening nonscripted entertainment formats, such as Unexpected Business and High School Rapper 4. The company will cement its digital competitiveness with strategies such as TV subscription increase with original content and curation and digital studio channel increase. Page 6. Commerce business [indiscernible] profitability improvement. Annual revenue grew 3.6% Y-o-Y at KRW 1.4786 trillion and OP grew 20.1% at KRW 179.2 billion. With continued strategy to focus on products and brands such as CelebShop edition, Daniel Cremieux, @sential, the portion of PB GMV increased to 18.2%. The company will continue to enhance TV competitiveness [indiscernible] and bottom line growth through mobile platform in 2021. Product portfolio [indiscernible] will be enhanced and mobile-only brand and platform competitiveness will be strengthened, expediting the company's digital strategy. Page 7, Pictures. Annual revenue from pictures business decreased 59.5% Y-o-Y at KRW 141.6 billion, reporting an operating loss of KRW 13.5 billion. Despite the ongoing pandemic situation, the business focused on risk-managed release [indiscernible]. However, the overall segment [indiscernible]. Even in 2021, COVID is a risk, but the business aims for a turnaround and a rebound by focusing on in-house planning and production capabilities. We have 45 [indiscernible] in production lineups, including titles such as Silence and The cursed: Dead man's prey. We aim to improve profitability of the business by expanding movie and drama transmedia strategy. Page 8, music. Music business revenue recorded KRW 180.3 billion, which is a 46.2% decrease Y-o-Y, but OP increased 17.3% at KRW 6.5 billion. With COVID-19, while profit revenue came to a halt, but with contributions from digital singles and album sales of new market, the profitability improved. Content signing and production will be strengthened in 2021, and the business will enhance overseas partnerships. Content synergy with Mnet will be developed further, and there will be much focus on increasing in-house artists lineup. In-house artists, including JO1, ENHYPEN have successfully made their debut and will strengthen our mega IP such as Girls Planet and Produce 101 Japan 2. Now we will hear the results from Studio Dragon.

[Interpreted] Good afternoon. This is Chul-Gu Kang, CEO of Studio Dragon. I would now brief you on our Q4 results. Despite the decrease in air titles in Q4 2020 with Netflix original Sweet Home and IP value enhancement through increasing library sales price, our revenues grew 41.3% Y-o-Y at KRW 137.7 billion. OP recorded KRW 4.6 billion, which is a successful turnaround with KRW 7.1 billion improvement over the previous year. This turnaround was made even with production cost increase for premium quality and incentive payments. Throughout year 2020, Studio Dragon enhanced its influence by exploring various genres and western IP-based premium dramas. With continued COVID-19, our library sales increased. With these factors, revenue for the whole year recorded KRW 525.7 billion, which is a 12.2% growth over the previous year. With higher IP value and efficient production leading to profitability improvement, our OP for 2020 grew at a rapid pace of 71.1% Y-o-Y at KRW 49.1 billion. In 2021, Studio Dragon wants to be more than a #1 studio in Asia. We hope to leap forward to become a premium story teller group by equipping ourselves with an [indiscernible] system, structure and competency this year. Streaming service will grow further in 2021 with more domestic and international OTTs coming on board. First, working with TVING and with expanded business model that makes this channel and platforms with Netflix and IP and also through strategic cooperation, we will expedite the digital shift that will bring the business maximized profit. As for digital lineup, we aim for over 9 titles, 3 for TVING and IP each, which is an increase by 7 titles. This number will grow to a double-digit figure by 2022, leading to maximize IP value. With Sweet Home and Crash Landing on You, we've proven that our best works work on the global stage. Studio Dragon will enhance the reach of key content with quality content. We will grow to be a global studio, focusing on tangible results of global projects that we are planning and developing with major U.S. studios. Yes. Now we will move on to our Q&A session.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be given by Park Sung-Ho Yuanta Securities.

[Interpreted] Yes. Thank you for the excellent results in Q4. I have 3 questions to ask. First, on your guidance for 2021. I see that your revenue is expected to [indiscernible] quite significantly for year 2021, whereas your operating number guidance sees a big decrease. Why Is this so? And where -- from which business unit does the decrease come from? So I would like to hear your answer on the first question. And now moving on to the second question. In year 2020, you have really cut down on production costs and added efficiency to your production. What about the production cost in year 2021? And since there was a significant cut in your production cost last year, do you think it's possible for another additional cut in year 2021? And I would also like to hear your view on TV market outlook. And now on to the third question, which is related to your TVING business. [indiscernible] I have read an article stating that over the 3 coming years, you will be spending about KRW 400 billion in terms of investment into TVING. And I believe that it is not a big number. This is rather a small number. So I would like to hear your view on the planned investment into TVING. And [indiscernible] they have formed an alliance, and I think it would be wise if TVING would form an alliance with [indiscernible] to target an even larger audience. But since there are so many involved parties, I think it's rather difficult strategy going forward. Could you please give the company's strategy for this business or the direction this business is headed for?

[Interpreted] So let me first give you the answer to your guidance question. As is disclosed, we aim to get a revenue number of KRW 3.8 trillion in 2021, which is a 12% increase Y-o-Y. Whereas our operating profit number, we expect it to stand at KRW 250 billion, which is an 8% decrease over the same period. Well, we believe that revenue from TVING and digital platforms will lead the media revenue growth. And in year 2020, with the influence from the pandemic COVID-19, Pictures business and Music business really underperformed, but we think these businesses will be improved in year 2021. And as for commerce business, it continues to increase its top line numbers. And so with that, we do anticipate our revenue number to grow further in the year 2021. But as for OP numbers, we hope to invest heavily in content in order to put a wider gap between us and the followers. This requires investment, investment into TVING content and original content, and that is the reason why we expect to see a lower OP number compared to year 2020. Yes. Now let me address your second question, which is related to our production costs. As you've rightly noted, our Media production cost was KRW 580 billion last year, which is a decrease by 5%. This includes amortization for our content. And well, in year 2021, I believe our production cost will be much similar to what we have spent in year '20. And we will move according to the movement of the TV ad market. However, in order to address [indiscernible] transition to a digital environment, we will be spending on TVING content and digital platforms and the original content.

[Interpreted] This is [indiscernible] from Content Solutions division addressing your TV ad outlook-related question. Well, we've resorted to external third-party data to come [indiscernible] the forecast. We've went with the numbers [indiscernible] some independent agencies. And with -- based on those forecasts, we do believe that the TV ad market will see a growth of somewhere around 3% for the year and digital advertisement is expected to grow at a 10% level. And with these given environment, let me now brief you on our ad strategy going forward. We want to grow in line with the digital market growth. So with our content competitiveness and with more sophisticated GMV data, we would be making extensive measures to address the changes in the ad market. And with these actions in place, I believe that we will be able to record a high single-digit number.

[Interpreted] So this is CEO Yang from TVING addressing your question on TVING's investment. Well, we did mention the KRW 400 billion in terms of investment over 2 years, and this number would be enough according to market predictions in order to enhance our paid subscription numbers. However, having said that, if there are any market changes and if there is some difference in performance of TVING, we could be adding to the aforementioned number and as per cooperation with all the potential partners aside from the current ones that we have. We are always looking into opportunities for our partners. And we are currently in discussion with potential strategic synergy-leading partners. So there could be an add-on to the number of partners that we have.

[Interpreted] The following question is by Sunghwan Kim from Crédit Suisse Securities.

[Interpreted] Yes. In your presentation, you did mention KRW 400 billion over 2 years which [indiscernible] or more paid subscriptions. So could you be more specific as to your spending for this year? How many original titles would there be for TVING? Well, I did hear the number 3 titles from Studio Dragon, but could you be more specific on the number of titles that are to be aired using this platform? And I do see a lot of renewal in TVING after -- well, there was a renewal, and after that, I do see many changes. So could you please be more specific on the numbers. And well, in your presentation deck, I saw the wording specialized studio in 2021. Well, is this specialized studio for mobile platform [indiscernible] short form? And my other question, for short forms and mobile specialized content, which business division will take care of this business? And do you have a number-wise goals for the short form and mobile specialized content? And do you plan to have a separate in-house studio that will take care of the short form and mobile-dedicated content? And my third question on TVING is, do you have any global plans to -- plans to go global? And if this becomes a reality in the future, well, won't there be a clash of interest with your current customers, including Netflix?

[Interpreted] Yes. This is CEO Yang from TVING addressing your question. First, on the results [indiscernible]. For Q4, we had select titles Mr. Queen and The Uncanny Encounter, and with these good content, our paid subscription numbers grew by 50.3% Y-o-Y. And with more original content and with more sophisticated U.S. in year 2021, we hope to grow this number threefold. This is our goal. And well, for your studio-related question, we really want more competitiveness when it comes to our TVING content. And we are thinking and looking into various options for original production and distribution. So we are looking at various options. And once things are made more concrete, we will be giving [indiscernible] message to you. And as for the third question, which is on our globalization plan, in year 2021, our primary focus will be with the domestic market. So as was mentioned, we will primarily focus on our domestic clients for this year. And as for our international clients, we are currently in the midst of discussion with various partners, potential partners. And once things become more concrete, we will be delivering the information to you.

[Interpreted] This is CFO Park addressing your question on specialized TV dedicated to digital content. So -- well, E&M is in charge of producing content for nonscripted entertainment for [indiscernible]. And we do take good [indiscernible] from Studio Dragon when it comes to our digital content. And as for the mentioned digital content, the whole company, the company as a whole, would be working on creating content for the digital platform. And our forte lies with our ability to create originals and also creating spin-offs from media. So when it comes to OTT content creation, it would be, as was mentioned, a company-wide effort. And then nothing's yet concrete when it comes to specialized studio plans. So if things become more clearer, we would be delivering the information to you.

[Interpreted] The following question is from Min Jung Kim from HI Investment Securities.

[Interpreted] Yes. My first question is your relationship with NCSOFT. Why did you enter into this relationship with NCSOFT? Because you hold the shares at Netmarble, why not Netmarble? Why NCSOFT? So this is my first question. And the second question is the contemplated W Concept acquisition. What's the purpose of this proposed acquisition? Well, you've merged E&M in the past, merged with the O Shopping. And at that time, you had announced your plans to create a global commerce platform. So I would like to hear more on your reasoning behind the contemplated acquisition of W Concept. And well, live concert, as you're well aware, is really taking off nowadays. Of course, Internet shopping takes up a different realm from home shopping. But having said that, home shopping is losing ground to other shopping platforms. And I believe that the CJmall alone, I don't think, [indiscernible] is being able to [indiscernible] the live commerce space. So I would like to hear the company's view on synergy between commerce and content.

[Interpreted] So from the Music business Mr. [indiscernible] will answer your question. Well, NCSOFT and Netmarble, they are both excellent gaming companies, but to be in an entertainment business together, we need to see eye to eye, we need to both have the same needs. And since NCSOFT shares the same ideals with the company, we thought it best to work with NCSOFT. And with this relationship, we would be creating and nurturing new music and new artist IPs. First, they would be introduced through the media and then later on, they will be making their debut. So to facilitate this work, we are planning to create a JV. We are currently discussing on it, but we have to yet iron out the details.