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

Good afternoon. This is Kay Choi from CJ ENM's IR team. I deeply thank the shareholders and analysts for taking part in our earnings presentation despite your busy schedule. Now we will begin CJ ENM's 2021 First Quarter Results Presentation. Please note that the financial and management results presented here have yet to undergo an independent auditor's review and could be subject to changes upon run. Today, here with us are CEO, Ho-Seong Kang; and Deputy President, [ Hee-Jae Kim ]; and Divisional and Department Heads. Now let me introduce who is participating in this call. We have Mr. Chun Kyu Park, EVP and CFO; [ Hu Gyeong Lee ], EVP; and Ms. Cho Young-ki, who is the Head of Content IT; Mr. [indiscernible] from IP Distribution; Mr. Seong-Hak Lee from C-Solutions; and Ms. Hee-Jae Kim from Commerce; and also Ms. Jin-Hee Choi from Pictures; and we have Mr. Yang, Ji-Eul from Music; and from Studio Dragon, we have CEOs, [indiscernible]. First, our CEO Ho-Seong Kang will present on 2021 major results and strategies.

Good afternoon. This is CEO Ho-Seong Kang, CEO of CJ ENM. In the first quarter of 2021, CJ ENM recorded best-ever operating profit with our content competitiveness and strengthened digital strategy. Market uncertainties continued through COVID-19, but we swiftly executed our digital strategy and continued to expand global markets. Whilst pursuing an innovative digital transformation, the company also is further fortifying our unmatched competitiveness in our traditional businesses. By increasing popular content and viewership, our first quarter TV ad recorded a strong growth of 24.5% over the previous year. Revenue both home and abroad continue to be steady. And with that, our media business recorded a high operating profit margin of 13.9%. TVING leads our digital content distribution strategy, and TVING continues to grow with increasing subscribers and traffic. The first quarter TVING paid subscribers grew rapidly at 29.3% Q-o-Q. Various metrics such as MAU, duration and traffic, sustained their positive growth. As was communicated at the earlier part of the year, subscriber growth is accelerated with regional content and library expansion. Commerce is also focusing on digital transformation and is executing market expansion strategies. Digital GMV recorded 53%, leading top line growth and with stronger digital business with live commerce and flagship stores of 15% per annum growth in GMV can be realized. Today, the Board of Directors resolved to create an ESG Committee and to strengthen our ESG activities. As a representative company that leads the industry growth, we will address our responsibilities and add value. I conclude by thanking the shareholders and analysts.

Now our results presentation. The quarterly and yearly results presentation of CJ ENM are based on K-IFRS consolidated numbers. Now we will hear the 2021 Q1 results presentation.

Good afternoon. This is Sang, Mook Hwang from CJ ENM. CJ ENM's consolidated revenue for the first quarter was at KRW 791.9 billion, which is a slight decrease by 2.3% Y-o-Y. However, our record operating profit at KRW 93.6 billion is an increase by 135.7%. TV ads, digital revenue and in-house artist concerts acted as profit leverage and contributed much to our operating profit. In the second quarter, TVING will increase the number of subscribers with enhanced distribution strategy and differentiated content. Commerce will expedite digital business fortification with mobile platform growth. More diversity will be added to pictures and music distribution, and business competitiveness will be stronger with our in-house artists. Page 5, Media. First quarter media revenues stood at KRW 386.2 billion with operating profit of KRW 53.8 billion, with more content viewership and consequent TV ads and MSL subscription revenue growth, operating profit margin recorded 14%, which is a record number to date. TVING paid subscriber base grew 29% compared to last year-end, and with that, our digital revenue continued to grow at a fast pace of 34% Y-o-Y. So in the second quarter, tvN STORY content will be launched. There are 2 pack senior new viewership, and with that, we're going to provide more content diversity, Welcome to The Witch's Diner and New Journey to the West and some other programs will be added to attract new viewers. Now Page 6, on Commerce. Commerce recorded KRW 330.8 billion in revenue and KRW 33.7 billion in operating profit in the first quarter. With decrease in demand in both fashion and beauty goods, revenue decreased over the previous year. However, with enhanced portfolio focusing on high-margin products, OP margins stood at a 10% level. Mobile and T-commerce GMV continued their rapid growth, centering on nutritional supplements and living categories. Commerce business will continue its strategy to enhance mobile platform in the second quarter. [ CJ All Star ], which is an integrated commerce brand, is expected to launch on May 10. With that, digital platform competitiveness will continue to be enhanced with thematic flagship operations and strengthened life commerce. Page 7. Pictures business recorded a revenue of KRW 22.7 billion, with operating loss of KRW 100 million in the first quarter. With continued influence from COVID-19, box office revenue plummeted by 96% Y-o-Y. However, ancillary sales grew 40.5% Q-o-Q at KRW 14.6 billion. Library sales of titles such as Collector and Pawn and online running of Werther minimized operating loss to reach BP. COVID continues in the second quarter as well, but we are continuing to address the market with diversified and flexible distribution. In April, Seobok released simultaneously on TVING and in the second half of the year, romance genre, Happy New Year will be simultaneous released. In the mid- to long run, we will focus on in-house production-based distribution strategy. Page 8, Music. Music reported a revenue of KRW 52.2 billion, which is a 31% growth Y-o-Y. Operating profit at KRW 6.2 billion saw a turnaround. Despite COVID-19, we've expanded online concerts, including KCON:TACT 3 and IZ*ONE, the company's cost of revenue increased. Album and digital single revenue also contributed to profitability improvement with a 14.3% growth. In the second half, the music business will enhance content synergy with Mnet, and will focus on in-house artist lineup. Produce 101 Japan 2, is aiming for a debut in the second half and through our in-house artist activities, including JO1, ENHYPEN and TO1, the business will enhance our IP. We'll continue with the presentation from Studio Dragon.

Good afternoon. This is Chul-Gu Kang of Studio Dragon. I will brief you on the management results of Q1 2021. Revenue decreased 2.7% Y-o-Y at KRW 117.1 billion. But our business saw quality improvement, such as diversification information with short and mid form. And as a result, viewership of different titles was positive as was domestic and overseas digital revenue expansion, including [indiscernible]. The profit structure saw improvement with production cost reduction and ASP improvements for new titles such as Vincenzio, Mr. Queen and True Beauty. And with that, our operating profit grew 53.6% Y-o-Y at KRW 17.9 billion. In particular, our OP margin grew 5.6 percentage points at 15.3%, which is an illustration of our quality growth. The number of titles is expected to decrease in the second quarter, but our business will pursue a structural growth in continued digital platform [indiscernible] and through strategic cooperation. We will focus on delivering tangible results in the global market and concentrate on materializing on becoming a global studio. Thank you.

Now we will be entertaining your questions. Due to time constraints, please limit your questions to 3 per person centering on core issues.

[Operator Instructions] The first question will be given by Mr. Park, Sung-Ho from Yuanta Securities.

First of all, I would like to congratulate you on the stellar results. I have a question for CJ ENM, and I have 2 questions for Studio Dragon. Well, your earnings results comes as really welcome surprise, of course, centering on your media business. So with that, do you have plans to upward adjust your yearly guidance of your operating profit numbers? The last guidance that we heard was at KRW 250 billion for the full year. So do you have any plans to upward adjust this number? And it seems that the TVING production cost execution was not that heavy. So will it be more heavy in the later part of this year? Or will it be a more even distribution from Q2 to Q4? Is it tail heavy spending? Or is it an even spread out? That's my question to CJ ENM. And my 2 questions to Studio Dragon, well, in the presentation I've heard, that the average selling price of your new titles have risen by 34%. However, on the same page, I see that your international or overseas sales have seen rather a decline. So I would like to hear more on this. And well -- can I assume that these good results was thanks to you curbing cost and will -- can this continue throughout the following quarters? And I also want to ask Studio Dragon on your international side. I see that you have huge plans for your international business. And will we be seeing any tangible results in the future? So this is my other question to Studio Dragon. And my other Studio Dragon question is that we've heard a lot about your collaboration with HBO, including -- for titles including Alone and Hotel Del Luna. So how is this progressing? So I would like to hear an update on that.

So our run rate as of today stands at 20.8% when it comes to our revenue, 37.4% when it comes to our operating profit. So we are off to a good start, and we continue to see good results, and we are checking our status every month. And should there be any meaningful changes and should there be any reason to adjust our numbers, we will be making sure to disclose the information to the investors. Now if I may ask -- I'm answering the second part of the CJ ENM question, which is regards to the production costs of the TV. Yes, in the first quarter earnings release session, we've also -- in our previous earnings release session, we told you about our plans on our production cost execution. And at the time, it was explained that it would be increasing as the quarters go by. It's going to see an increase and with this increase in production cost, there will be more content. In the first half of this year, we've experimented with our new nonscripted formats and scripted formats, including New Journey to the West, SPRING CAMP and [ High School Detectives ]. And with all these research works, we have confirmed the ties between content and VOD subscription. And with this, we can provide differentiated content to our viewers that our peers cannot.

I would like to address the first part of your question, which was on our ASP enhancement. As was mentioned during the presentation, our new title ASP has seen increase by 34%. And while our title of sales, you have to separate it into sales, general sales and VOD sales. And as for our VOD sales, it has seen a rise by 96% Y-o-Y. And excluding what we provide to Netflix, the airing rights has seen a 2% rise. Now on a projection for the next quarter, well, in the first quarter the individual content did excellent. With that, we saw our ASP increase, and we saw diversification in our distribution, including our digital channels. And this stance will continue going into the future quarters. So in the second quarter, our pipeline includes Mine from a renowned author or scriptwriter, Baek Mi-kyeong. And for IP, we will be providing them with an original My Nine-Tailed Fox Girlfriend brand. We also have a promising content from a very renowned writer too. And you referred to the 18 potential overseas projects. And to win a series order, it takes at least 2 years. But I can say that we have about 1 or 2 titles, which has gone from the second stage to almost close to receiving the series order.

The following question is by Mr. Kim, Hoi Jae from Daishin Securities.

So my first question goes to Studio Dragon. You have given us stellar results. Can you add more color on as to the reason why? And can this result continue into the future? And I have a question for the Commerce business of CJ ENM. I hear that you're planning CJ ENM integration, what is the anticipated synergy effect with the media decision?

So well, I will give you the answer from Studio Dragon. Yes, in the first quarter, we've seen much improvement to our results, and it was not a one-off thing. It was due to content competitiveness itself. The individual contents were strong. And with that, we were able to further elongate the long tail of our IP. And it shows that the shared enrolled, just more content does not really necessarily has made into good results. You need quality titles in order to get the results. So we had internationally obtained titles such as Sweet Home and Love Alarm, which made global top 10. And with this, we were able to influence our negotiation powers. And with that, we've seen those results. And although we've begun small, we will continue with our IP-based business diversification. And with all these activities in place, I believe that we could sustain into the second quarter as well.

Now I will address the commerce-related question. As you are well aware, we will be launching an integrated brand called [ All Star ] on May 10. It's an integrated brand that combines together the TV home shopping channel and CJmall. And as you are well aware our TV home shopping business has been merit associated with business that is wide, and it has the planning capabilities to tailor to the diverse requirements of our customers. And should we bring this foray to our mobile platform, we will be able to witness an even faster paced growth, and we will be able to prepare ourselves for the future. So with these reasons, we are prepared for this integrated brand launch. And when we only were a TV home shopping channel, our collaboration with CJmall was somewhat limited to maybe PPLs with [indiscernible], but should we expand our platform to include mobile, we could further utilize the E&M IP, and we could also delve on the strength of TVING. And with that, we will be able to create new value add. Should we see more details coming to being, we will be making sure to communicate it to you.

The following question is by Mr. Kim, Sunghwan from Crédit Suisse.

Yes. First of all, congratulations on your stellar performance. Well, I have a question related to the subscriber base increase of our TVING business. We received a lot of data from paying data provider. So we have a comparison of your numbers compared to your peers. Would you say that you have outperformed compared to other OTT players? Or is it an underperformance? Well, your number is increasing, but what does -- in relativity terms, how did you outperform your competing OTTs? And well, I believe that you have to compete on content powers. And I know that you are currently engaging in promotional activity in May and do you have any plans to enlarge -- expand promotional period to extend into the month of June? That's my question for CJ ENM. And I have a question for Studio Dragon. In the IR material, I read a phrase on your partnership with [ My Lab ]. What is the implication of this partnership? I would like to hear that. And also on your drama title, which is scheduled to be released in the second half of this year in Ireland. I hear that there are issues with the actors appearing on Ireland. So could you please address this question, please?

Yes, you've mentioned a few data providers, and we also check their data. And according to our research, I can say that we have outperformed market this quarter compared to peers. It was because our content strategy was on mark, and it was also thanks to our collaboration with Naver platform. As you're well aware to the membership plus the members of Naver, starting on March 4, we provide promotional benefits. And that the promotional actions will start influencing our numbers starting in the second quarter. And as was mentioned during our previous answers, content investment will see an increase going into the later quarters. In the second, third, fourth quarter, there will be more investment into our content, which would translate into more quality content and thus better results.

Yes, you mentioned the implication on our collaboration with [ My Lab ]. Well, we hope to strategically create a franchise to continue IP profit. And we also will be using tenfold titles to get popularity and also to get market retention. And our collaboration with [ My Lab ], well we procure the source IP in a structural and exclusive way for Korean superheroes.

And as to your second question for Studio Dragon regarding Ireland, well, it was a long-term project for us. It was slated to bear in the second half, but we can't take an even longer view on this. And we could see it aired next year. And I know that there have been some issues with the starring actress, but as of today, there are no big issues concerning our actors in that title. And we do also have a healthy lineup of other titles as well.

[Operator Instructions] The following question is by Mr. Lee, Ki-hun from Hana Financial.

The first question is on the TV ad market. Of course, there must have been some baseline effects in the first quarter. So even with the baseline effect [indiscernible], so congratulations on that. And with that, do you think you can move up your overall TV ad guidance for the second quarter and the third quarter? This is my first question. And my second question is related to your music business. I see your music business has profit -- given a good profit. Is it because of the last contribution from IZ*ONE? Or do you think this is a sustainable number with JO1 and ENHYPEN now in your pipeline?

Yes. This is Seong-Hak Lee from C-Solutions. I will be addressing your TV ad question. Yes, it's true that we did enjoy our baseline effect in the first quarter when it comes to our TV ad numbers, but having said that, for the year as a whole, we believe the TV ad market is low -- somewhat close to a 10% level. And the digital ad market could see a growth of 15%. And with -- well, in the second quarter with quality content, with much anticipated popular content, I think we could continue our move to this direction. And with tvN STORY, we have enlarged our target audience pool, and with that, we would be enjoying enhanced viewership. And we would fortify our programming for our major channels. And we would also be working hard with our digital ads and maximize the ROI that goes to our advertisers. So in the second quarter, I believe we could enjoy even a better result than the first one.

Yes, it's true that we did enjoy a good result with the activities of IZ*ONE. And if you compare the situation of last year's Q1, well, much -- many of the concerts were canceled due to COVID-19, and there's this pent-up demand for concerts. And we were able to bring this demand onto our online channels. And as you're well aware, JO1 have begun their activities in Japan in April. And they have the most recently made #1 in the Oricon chart. This is a good result. And ENHYPEN which debuted in the second half of last year, they are also performing well. And their activities -- well, we will see these activities translate into our results. And with a better situation, concerning COVID-19, the pent-up demand for live concerts will really help our results.

The following question is by Ms. Shin, Eun Jung from DB Financial Investment.

Yes, I have 3 questions regards to your TV business. You have mentioned [ you're ] competing successful through various metrics. Could you be more specific when it comes to those major decisions? You disclosed the ARPU numbers that [indiscernible] in evaluating [indiscernible]. When can we be able to know this base? And my second question is our investment recognition, content investment recognition. Well, how is it recognized? Is it done over different quarters or on an annual basis? Is it expense or what about the amortization rate? If it's amortized, could you please tell us the rate of amortization or depreciation? And my third question relates to TVING investment once again. You said, TVING we're seeing more content investment in the later part of this year. So could you please if possible give us a breakdown of investment towards the latter half of this year? If not, could you disclose the first quarter investment amount so that we could compare?

Yes, I would be addressing your 3 questions related to TVING. [indiscernible] detailed notes, well, we will be making sure to communicate it to you in the near future on our customers and the progress of our TVING business. And in this presentation, we've given you the increase in our paying subscriber basis on a Q-o-Q basis. But one other indicator that I can tell you is the number of unique visitors increased. A good indicator of how well our business is performing. And in the first quarter, we've seen this rate to go up 45%. We also measure the number of new subscribers and what they are doing on the platform [indiscernible]. And once we get all the information ready, we will communicate it to you. And on amortization or depreciation of our content or the production cost, well, we do what the industry is doing. We [indiscernible] in our depreciation [indiscernible] the content production as well. And now on your first question, well, it's really difficult to pinpoint the exact number when it comes to our production investment. As we've mentioned during the previous answers, it's tail heavy and -- in the fourth quarter and going to the year 2022, it's most likely to see an increase. It's because we've identified these [indiscernible] for content strategy. And with this expectation, we will be flexible in executing our investments. [indiscernible] numbers for our TVING business. In the first quarter, our revenue with TVING stood at KRW 19.3 billion, with an operating loss of KRW 7.1 billion. And as for depreciation, well, we apply 24 months of useful life to our content. And 60% of it is amortized over 3 months, and the remaining is depreciated in a straight-line method over the remaining useful life. And as for our content production cost, well, we look at how the [indiscernible] number is increasing, and we also look at the synergies that it creates with free channels. And well, we do see meaningful increase with our nonscripted formats and our music format and our scripted formats as well.

The following question is by Mr. [ Kim, Dong-Young ] in from CLSA.

Yes, many global OTTs, including Apple, Disney and Amazon are planning to come to the Korean market. So are you engaging in the discussion with them to provide them with original content? How deep is your communication with the other global OTT players? And I know that you have a very strong partnership with Netflix. And could this partnership get in the way when it comes to relationships with other global OTTs?

Yes, you refer to the Netflix finding deal about -- well, having said that, Netflix is a good partner to us. And they're also, at the same time, a very good competitor to us. And we have built the required production reference with our collaboration with Netflix on the global stage. And this reference cases, they have been a very meaningful support to our business. But as you're well aware, the market environment is rapidly changing. So for this year, our top priority will be given to our own OTT platform, which is TVING. And at the same time, we would also be engaging in meaningful discussion with other global peers, including Apple, Disney and some other Chinese players. So we could talk with these international partners through Studio Dragon with their project. And we could also think about the additional businesses with CJ ENM. Well, it will be a balanced strategy and everything centered around our quality content.

Since we have no further questions, this will conclude Q1 2021 earnings release session of CJ ENM. Thank you very much.

This concludes the fiscal year 2021 first quarter earnings results by CJ ENM. Thanks for the participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]