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

[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 2022 first quarter earnings results by CJ ENM. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions]. Now we should commence the presentation on the fiscal year 2022, first quarter earnings results by CJ ENM.

[Interpreted] Good afternoon. This is Kay Choi of CJ ENM IR team. I deeply thank shareholders and analysts for taking part in our earnings release session despite your busy schedules. Now we will begin our earnings session for Q1 2022. 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. Today with us are CEO, Ho-Seong Kang and Heads of different divisions. We have CFO, Chun Kyu Park; EVP, [ Yoo Jin Lee ]; CFO, Kyu Chun; Head of the IP Business, [Hyeong-Jin Jeong ] from Content Solution, Seong-Hak Lee; from Commerce Business Unit we have [indiscernible]; from Pictures Business Unit we have [indiscernible]; from Music we have [indiscernible]. And we have 2 CEOs, from Studio Dragon, CEO CK Kang and Young Kyu Kim; and from TVING, we have also 2 CEOs, Ji-Eul Yang and [ Young Han Lee ]. First, CEO, Ho-Seong Kang, will deliver our major results and strategy to you.

[Interpreted] Good afternoon. This is Ho-Seong Kang, CEO of CJ ENM. CJ ENM continues to execute its strategy to enhance content production and global market competitiveness. In Q1, we have completed the acquisition of Endeavor Content a production studio in the U.S. and the foundation of CJ ENM Studios, a new studio in Korea with the establishment of a multi-studio system, we will strongly expand world-class IP through co-planning and production. We are further strengthening cooperation with global partners in not only the U.S. but also across the globe, including Latin America and Europe to coproduce and distribute our content. The company has increased content distribution cooperation with Paramount Plus and OTT. We are coproducing content with HBO Max. CJ ENM continues to strengthen production and distribution with renowned global partners in the U.S. market as well. This is the third year of the company's earnest effort to enhance multi-studio strategy and global business. In this light, all studios are actively engaging in original content development and coproduction. Studio Dragon is working in big titles, including Duty After School and Island. And Dragon content is also expanding OTT platform titles such as Lost Flower and Surfside Girls. Going forward, CJ ENM will represent Korea and [ cement ] our global growth. Based on our established business competitiveness, we will deliver key conference to the domestic and also the global markets. I thank the shareholders for always being with us in our growth journey. This concludes my presentation. Thank you.

[Interpreted] Now the results presentation, CJ ENM's quarterly and yearly results numbers are K-IFRS consolidated numbers. Now 2022 Q1 results.

[Interpreted] Good afternoon. This is [ Jae-Min Baek ], Head of Finance at CJ ENM. Consolidated revenue grew 20.9% Y-o-Y at KRW 957.3 billion, but OP decreased 47% at KRW 49.6 billion. The decrease was due to profitability decrease of media, the lack of lifestyle, GMV decrease and expense increase of commerce. Entertainment reported revenue of KRW 640.0 billion with OP of JPY 36.7 billion. Commerce saw revenue of KRW 317.3 billion with OP of KRW 12.9 billion. The company reinforced content and brand competitiveness in Q2 with [indiscernible] featured on music live business, we aim to restore profitability. The media business continues to strengthen channel and digital competitiveness. Commerce is focusing on recovering GMV based on product performance. In line with market reopening, picture business is enhancing pictures release strategy. After music business, we have expectations for our in-house artist global activities. Page 5, Media. Media business revenue in Q1 stood at KRW 546.4 billion, which is a 41.5% increase Y-o-Y, continuing its top line growth. Despite the high base effect from last year, TV ads continued its steady growth of 8.1%. Digital revenue also continued its rapid trajectory with 55.8% growth However, we saw a temporary profitability decrease with OP dropping 38.2% Y-o-Y at KRW 33.3 billion. The main cause of this was one-off expense due to Endeavor Content consolidation and production cost expansion with more original content. So we will also be enhancing our portfolio and content with The Backpacker Chef and we would also be enhancing our activities with tvN STORY and tvN SPORTS. On TV, we will also be working hard to increase the paying customers and work on its content competitiveness. Page 6, Commerce. Commerce business unit revenue decreased 4.1% Y-o-Y at KRW 317.3 billion. OP decreased 61.6% Y-o-Y at KRW 12.9 billion, with more outdoor activities, high-margin category GMV. The profitability showed lackluster performance with PB inventory valuation loss and platform commission increases. Product portfolio, including beauty and fashion will be announced in the second quarter. The business will increase TV GMV to position as a [ brand ] company. Through new launch of [ vertical ] platform and strengthen digital business, the business unit aims to recover GMV within large customer pools. Page 7. Pictures. Thanks to the strong performance in Turkey and Vietnam, Q1 pictures revenue grew 18.6% Y-o-Y at KRW 27.0 billion. Revenue was weak in the domestic market and with production loss of Hide & Seek and cost recognition of Endeavor Content consolidation, the business recorded a loss of KRW 9.4 billion. But since reopening in Q2, the business is strengthening its release strategy focusing on major titles. Broker is to be released from June 8. And on June 29, Decision to Leave is scheduled to be shown. And with Alienoid in the summer peak season, the business will enhance [indiscernible] revenues and profitability. Page 8, Music. Music revenue at KRW 66.6 billion increased 27.7% over the previous year. OP at KRW 12.9 billion, increased 107%. With album sales of Kep1er and ENHYPEN, album revenue showed good performance. Overseas revenue setting on the Japanese market also continued its rapid growth. And the second part, the music business will also benefit from reopening. We will be seeing more concerts and convention. We will be at KCON and once again detailed. And we also are expecting activities from INI, JO1 and TO1. We do expect to do much more active activities for our new albums both [indiscernible]. Now we will continue to hear from Studio Dragon.

[Interpreted] Good afternoon, this is Young-Kyu Kim, CEO of Studio Dragon. I will review our 2022 Q1 management results. Revenue in Q1 '22 recorded KRW 121.1 billion of our aired titles such as Twenty-Five Twenty-one and Military Prosecutor Doberman brought positive results. And with expanded TVING offering including Juvenile Justice and The King of Pigs, Bad and Crazy which were all part of OTT. We witnessed a 3.4% Y-o-Y growth even with fewer titles there. Our OP recorded KRW 18.1 billion. Our content's division in the global market and continued demand for them but to increase in price and volume for our newer titles and also older library titles. And with that, we saw a growth of 1.4% over the previous year. TV and OTT for digital online would like to see an increase in Q2 2022. [ Tempo ] titles such as Our Blues, Monstrous and Alchemy of Souls will lead revenue growth as well as the [ unit cell ] season 2. We've expanded business with the new global OTT platforms and sales of our new and library titles, we aim to record a strong growth. Starting from the second quarter, we will earnestly engage in ESG management strategies and premium storytelling. We will try to create sustainable and social value.

[Interpreted] Now we will continue to entertain your questions. Due to time constraints, please limit your questions to 3 per person and centered our core issues.

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

[Interpreted] Yes, I have 2 questions actually. First, could you carve out the results of Endeavor Content -- carve out Endeavor Content's results. And you talked about a one-off effect related to the acquisition and merger of Endeavor Content. Could you please elaborate further on like the one-off costs? And is it possible to see a normalized level of earnings in Q2 and if possible could you provide us with the guidance. And this is my second question, it is related to your presentation, Page 3, you've mentioned the establishment of a new studio and how is new studio [indiscernible] Studio Dragon and Endeavor Content. Well, is it done for different platforms or will they be handling different formats? And how is the different from the coproduction that you forementioned. I would like to know these points.

[Interpreted] Yes, I would like to address the first question related to Endeavor Content. Well, the carved out number for Q1. Revenue-wise, it was KRW 117.1 billion, and OP is minus [ KRW 17.1 billion ] and the loss was due to delay in production due to COVID-19, not a cancelation, but a delay. So the titles will be coming on quite soon. So this is a temporary loss number. And this a multi-studio design, So in Q1, we have already 4 titles and of the 4, 3 are already waiting for Season 2. And it would be an aired on Apple TV and streaming ranking-wise, it's rank #2. So once again, it's a delay due to COVID and projects will be coming on board.

[Interpreted] And if I may address the second part of your question, which was on our multi-studio strategy, we have been revealing the strategy to the market over several locations. So each individual or different studios, they will have their forte in different areas when it comes to development and also production. And there won't be segregation of channels and platforms dedicated to different studios as there have been some concerns of digital tool in the market. So for example, Studio Dragon is to work with the platform on channel A, it does not mean ENM studio content would be excluded from using this platform A. So with multi-strategy or multi-studio strategy enhances our capability or capacity and will also be adding to the volume of production. So different studios, they will be working with different writers and different producers so it would also be adding to the diversity of the programs that we offer. And as for coproduction, a more detailed explanation will be given by Studio Dragon.

[Interpreted] So this is the answer offered by Studio Dragon, on your question related to coproduction. Well, we have to improve the probability of having a hit title back for the U.S. market. So Studio Dragon has its own creator pool and well other studios also they have their own creator pools, and we hope to bring together the forte or the strength of the different talent pools. And that would allow us to enjoy more synergy. And with that, we would have higher probability of offering the U.S. market or the bigger markets with the hit title. And well, these -- different studios, they have their strength in different areas. For example, Studio Dragon, it's strength lies in storytelling. And other studios, they may excel at creating impactful scenes. And if we bring these strengths together and engage in coproduction activities, once again, it could enhance the probability of offering a higher hit ratio title to the U.S. market. So we hope to work the strengths of different studios together. And by having this combination once again, we hope to see a higher hit ratio when it comes to our talent pool titles.

[Interpreted] And as for studios related question, it's at this given point in time, difficult to disclose any titles, but we do have CEO, Ho-Seong Kang, who will would heading the studio with us, so he could provide you with more details.

[Interpreted] Yes. This is CEO, Sung-Su Kim, heading CJ ENM Studios addressing your question. So Studio Dragon will be mostly working for OTT [ band ] original. The Studio Dragon has been doing an excellent job in their own area, but we are a bit different from them. So we are going to work with movie directors. And recently, as many movie directors are trying or attempting to tackle the OTT market with the original title. And we will be making focused investments in this area. And we won't be doing it alone, we have good original IPs, and we also need the planning and development capabilities as well as the help of outstanding creates. So we will work together with Endeavor Content and also Studio Dragon and get their help in the original IPs and also with the talent that they created. As is mentioned by CEO, Kim, Studio Dragon has excellent storytellers, who have been scripting drama scripts for many years. And as for us, we have movie directors who can create significant scenes. And if we bring these staff together, we can work together on global bond big tempo titles. So as mentioned during the previous answer, it won't be cannibalization. It will be an addition of capability and capacity. And I cannot give you any name today but we are currently negotiating terms with the multiple global OTTs. And well, as I mentioned, we do get inbound increase from a top level, top tier. We will be producing companies and also directors. So once again, we will be working together with our sister studios.

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

[Interpreted] Yes. My question is that for Studio Dragon. You talked about your content sales in the previous quarter. And my question is specifically related to your library sales. In your sales how many -- how much of a percentage is related to your library sales? And my follow-up question was -- my second question is also related to the first one. Well you talked about an increase in content sales, you talked about number 50. And then in the next quarter, it was down to 20. So on a yearly basis, I think this was less than expected. On a quarterly basis, what is your expected number for your content sales. And if you carve out the sales of library titles, what was your content sales number be on a Y-o-Y basis? How has it changed?

[Interpreted]. So if I may address your 3 questions, the library percentage on a yearly basis, it's almost -- it's about 30%. And our yearly outlook for content sales was at 50% increase, and you said that our Q1 numbers may seem quite lower. And because the original content sales had a big influence on our overall revenue number -- overall content sales. And our originals, they are mostly to be aired in the second half. So if you include the second half numbers, I think we will be well meeting our target number of 50%. And as for carving out the library sales from our overall content sales numbers. Well, we sell the older titles and new titles together, they create a synergy. So it's really difficult to carve out the library sales number from our overall sales numbers.

[Interpreted] The following question is by Minha Choi from Samsung Securities.

[Interpreted] Yes, I have 3 questions. First, content, while you talk about consolidating their numbers into your numbers. And I believe the numbers were split into your media business unit and also your pictures business unit. So in terms of number of titles lined up, could you please talk about how many titles have gone for the media business unit and how many titles belong to the pictures business unit. And my second question is related to your TVING business. Well, how is your paying subscriber base is growing? How has it grown in the first quarter? And my related question, I also see that you have fans for the overseas market, including Japan and Southeast Asia. When did you expect timing to be for you to go overseas with this business. And 1 more about TVING. Well, how you will be working together with Paramount Plus. So this was my TVING-related question. And my other question is related to your financials. I see other losses numbering [ KRW 3.6 billion ]. Is it because of the consolidation with Endeavor Content? Is it a one-off thing? Or is it related to other impairment issues?

[Interpreted]. So the first question will be addressed by our CFO. The following question by CEO, Kang and the other question will be addressed by our Head of Finance.

[Interpreted] Yes, you asked on the number of titles that will be created by Endeavor Content. Well, I did talk about the delay in our production schedule. And there still continues to be some uncertainty when it comes to production schedule. But with that being said, we do expect to see the introduction of about 13 to 15 titles by Endeavor Content. And there is a slightly more delay on the drama side and the split titles between drama and pictures, it's currently somewhere around [ 46 ] split. But we hope in the long run that the drama portion accounts for 70% and pictures account for about 30%. And if I may give you more information on how Endeavor Content recognize its revenue. It recognizes upon [ delivering ] not upon release. So I just mentioned, there was some delay in Q1 and only one title was delivered and that led to a multi loss of [ KRW 17.8 billion ]. But there will be more delivery in the second quarter and the second half.

[Interpreted] Yes. This is Yang from TVING, addressing your TVING-related question. On your subscriber question, well, -- on a Y-o-Y basis, we saw the number of subscribers increased by 30%. But on a Q-on-Q basis, we are seeing temporary stagnation and the viewer pattern in other global markets, it has -- the viewers on OTT, the number of viewers on OTT has transcended or has increased beyond the number that we see by TV and cable TV watchers, but that is not yet the case in the Korean market. So with that, we believe that the Korean OTT market has potential to grow even further. However, COVID it was reclassified. It's currently being reclassified as an endemic not a pandemic. So there has been a rapid TVING regulations Korea. And with that more and more people are going outdoors to enjoy outdoor light. And with this, we are seeing a drop in viewership and with overheated market competition and overflow of content. There also is an issue of a viewer fatigue. However, we do foresee a market normalization starting second quarter. And with that, we will be seeing our subscriber growth rate to go back to what it was and we also will be working to provide more original content to our TV platform. And as for your second question, which is related to our relationship or work together with Paramount Plus. By working together with Paramount Plus, we hope to give more choice to our viewers or our customers. And we would also be discussing with Paramount on marketing activities and on how to supply quality content to the viewers. And should we get the details ready, we would also be delivering the related information to the market and to you. And we've also been enhancing our activities together with Naver on how to deliver our content and also on other ways and measures to. And now on to your third question related to our activities overseas, our planned activities overseas. Well, we hope to bring TVing to Japan and also Taiwan market. We are currently discussing with the many potential partners on ways of future cooperation. And well, we hope to duplicate our domestic success in the overseas market as well. We hope to bring the profitability too. And we are currently discussing with potential partners explaining that we have a better chance of success in our potential global market. And we will be running various detailed simulations to come up with a more concrete plan for a more concrete execution and should things will become more fairer, we would also be delivering the information to the market.

[Interpreted] And now on your other nonoperating loss related question, well, the number here is somewhere around minus KRW 40 billion. And most of it has to do with the LiveCity. Well, there has been a change in LiveCity related plans and the design costs related to design and -- the design cost of LiveCity. Well, it actually come after a week since we had a change in plan. And with that, the asset recognized the design costs have become obsolete led to a loss of KRW 29 billion And there was a small spending on M&A amounting to KRW 1.3 billion. So out of the KRW 40 billion loss, KRW 30 billion is a one-off thing.

[Interpreted] And if I may add, well there has been some equity method losses but I cannot give any names mater because of regulatory issues, but please note that there was an equity method loss as well.

[Interpreted]. The following question is by Hwa-Jung from NH Investment Securities.

[Interpreted]. Yes 2 questions. First is on purchase price allocation related to the acquisition of Endeavor Content. Could you please provide us with detail on your PPA plan? And my second question is related to TVING. I believe that there was more content-related spending related to TVING. And what good is influenced the guidance number of that division?

[Interpreted] Yes. On to your first question, which is related to purchase price allocation. We're still working on it. And well, should we start to honestly work on it, the intangible asset will be amortized and the numbers would go to our operating profit numbers. But as of today, we are still working on it. So it's not been expensed as SG&A numbers. And well, currently, the premium paid on our capital on the acquisition, it's currently being recognized as goodwill. Yes, if I may give you more number-wise answer to your previous question. Well, we have acquired Endeavor Content at KRW 936 billion and the net assets of Endeavor was at KRW 468 billion. And we're still working as it is mentioned on the PPA and the PMI process and the goodwill paid on this project or this case was KRW 468 billion. And now on to your second question related to probable changes to our guidance. As of today, I cannot talk to changes. The production costs related to [indiscernible] and if you look at the run rate, it's in line with the guidance number that we provided. And well, all in all, our production expense cost expected is at KRW 80 billion. And if you look at the as company a whole, well, it's in line with the projected number and it's under 20%. If you look at the run rate, it's under 20% of our expected production cost as of Q1. Yes, if I may give you more number-wise answer to your guidance-related question, including TVING and other channels. Well the guidance number that was issued at the earlier part of this year stood at KRW 860 billion. And of that non-captive accounts for KRW 120 billion. But for non-captive it's a cost-plus basis, so it moved right into the company. So if you take up that KRW 120 billion will it leaves us with KRW 740 billion. And if you look at the run rate for TVING and channels in Q1, the run rate is under 20%. So once again, when it comes to production costs, it's in line with the guidance number that we issued at the earlier part of the year. And should we complete the PMI process related to Endeavor Content, we will be disclosing the new findings to the market.

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

[Interpreted] Yes, I know that the market is still open. I know you're very busy, but still, I would like to thank you for joining us in our earnings session. And with that, I would like to conclude Q1 2022 earnings session of CJ ENM. Thank you.

[Interpreted] This concludes the Fiscal Year 2022 First 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.]