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

[Interpreted] Yes. We would also like to hear some comments from EC.

Sure. [indiscernible] as we mentioned, we obviously recognize revenue and profit on delivery of shows. So the timing of shows is crucial for that. And the delays created by COVID last year impacted that, but we have a robust and growing pipeline both for now and certainly for the future. We've got some phenomenal projects going into production and in prep for next year. So feeling good about the pipeline. On your second question in terms of the synergies [ with CJ ], these are all development projects at the moment. Typically, development projects will take maybe 12 to 18 months in that cycle. But we're feeling great about -- both about the way the teams are working together, but also about the prospects, the combination of the fact that both Korean language is setting the audiences on fire, as we would say, around the world, that trend combined with some of our work in being able to blend languages in shows -- I mean, for example, Tokyo Vice, which we released earlier this year on HBO Max in the U.S. and networks around the world, is a kind of perfect example of a high-budget premium show. In that case, it was 50% English language, 50% Japanese language approximately and certainly the largest television production to take place in East Asia by budget size. And it's the sort of confluence of all of these trends that gives us a huge amount of optimism for what CJ ENM and Endeavor Content can do both on the premium end but also just on the volume end over the next 2 to 5 years.

[Foreign Language]

[Foreign Language]

[Interpreted] So I would like to hear more from Studio Dragon on the coproduction side of things.

[Foreign Language]

[Interpreted] Yes. Chris has already well covered the way we collaborate with each other, and there are mainly 3 [ tracks ] that we go by. First, Studio Dragon [ typically bring in IP of ] Endeavor Content and use it here in the domestic market. And secondly, well, we have our drama and also movie IPs which Endeavor could use in their territory. And the 2 companies can work -- the 2 studios can work from scratch with -- on new IPs and with new works from our creators, starting with novels or other IP sources. And so we could, from scratch, co-develop and co-plan new [ types ] going forward. And well, Studio Dragon and CJ ENM with the Pictures business, we will be embarking on, in earnest, on drama creation in the U.S. territory. And in the process, we could really enlist the help and enjoy the synergies that we do have with Endeavor Content.

[Foreign Language]

[Interpreted] The following question is by Kim Hoi Jae from Daishin Securities.

[Foreign Language]

[Interpreted] Once again, question goes to Endeavor Content. Studio Dragon now has mentioned the 3 types of joint work that we could engage in or the 3 tracks. And if you can elaborate on these tracks and if you could give us any concrete examples, that would be much appreciated. And the pipeline, the number of [ 13 to 15 ] was mentioned during the presentation and during the answer. And what is the projected mid- to long-run lineup number of titles perhaps in 3 to 5 years? And what is the expected revenue generation from these projects? And now the question goes to CJ ENM. You have upward adjusted the revenue outlook. But the operating cost base guideline or projection, it remains the same at KRW 27 billion. Why is that so? So that was my second question. And now my other follow-up question goes to Studio Dragon. Well, I know that your contract with Netflix is nearing its closure. Do you have any plans to renegotiate the contract with Netflix? And if so, on what terms and conditions? And once again, a question for Studio Dragon. In your presentation, you've mentioned about the stronger bargaining power with platforms. Could you please elaborate on what you mean by stronger bargaining power? And on Page 9 of your presentation, well, I think there was some contract mentioned with OTT Amazon Prime, I think it is. So could you please give us more color on that contract as well?

[Foreign Language]

[Interpreted] So I would like to ask Endeavor Content to address the first question. And I would like to ask CJ ENM CFO to address the second question, followed by the third answer, which will be addressed by Studio Dragon.

Sure. This is Chris again. I'm not going to get into much detail on this, I'm afraid. Just it's very early on in the development cycle, and certainly not going to get into revenue projections on these shows at this stage. What we can say is we've acquired, together with either Studio Dragon or CJ ENM Studios, multiple bits of IP, books, et cetera, that we have bought together and are starting to develop in the script stage. And we've taken multiple existing film and television titles where we are either sort of treated them as a format and readapting them for a different market, or where we're kind of taking an extension of what that existing film or television title is. So quite a few different lanes and feeling really good about the pipeline.

[Foreign Language]

[Foreign Language]

[Interpreted] And now to the second part of your question, which was on our guidance revision. As you've mentioned, in our disclosure, we have upward adjusted our revenue guidance by 11.8% at KRW 4.8 trillion. It was mainly due to consolidation of Endeavor Content numbers. However, having said that, our operating profit guidance remains the same at KRW 27 billion. Well, as was mentioned during the presentation, the contribution -- profit contribution from Endeavor Content in the first half is yet limited. So that is the reasoning behind us maintaining our previous position when it comes to our OP projection. However, in year '23, we will see more contribution in terms of profit from TVING and EC. And with that, we will be seeing an adjustment to OP guidance as well.

[Foreign Language]

[Interpreted] Third answer, please.

[Foreign Language]

[Interpreted] Yes, well, it's true that Netflix and other global OTTs do want our content. And we are, as Chris mentioned, negotiating with various OTTs in our supply of content to the OTT platforms. As for the details, I'm afraid I cannot disclose them today. But as was mentioned, there are more platforms nowadays that wishes to get from us our content. And with that, we're seeing those contracts work favorably for us. We are working together with Netflix so that we end up in a win-win situation. I believe more details will be added in the third quarter, and we hope to finalize our contract then. And well, as for our negotiations with Amazon Prime or our contract with Amazon Prime, well, we are currently working on it. And there will be new titles plus library titles that Amazon will be getting from us, but we have yet to add more details to this contract as well. And once things are more finalized and become more concrete, we will be officially disclosing that back to the market.

[Foreign Language]

[Interpreted] The following question is by Ahn Jin Ah from eBest Investment Securities.

[Foreign Language]

[Interpreted] I have 2 questions. First is on your nonoperating expenses. I see here in number terms, it's somewhere close to KRW 40 billion. And last quarter, I also believe I saw a number close to [ KRW 30 billion ], and I think it's to do with your financial losses. And I also see that affiliated company [indiscernible] [ KRW 30 billion ]. And I would like to hear why these nonoperating losses were made. In the first quarter, I remember that your nonoperating losses stood at KRW 46 billion. And in the last quarter's earnings release session, you've mentioned of the KRW 46 billion, KRW 30 billion was a one-off thing. But once again, in the second quarter, we're seeing these numbers. So is there a possibility that we'll see such losses again next quarter? So that was my first question relating to operating -- nonoperating losses. And my second question goes to your Music business. Congratulations on your good results, the back-to-back good results. I hear that ENHYPEN has plans for a global tour in the later half of this year. And how will the settlement be done, payment settlement and allocation? I would like to know more about that structure. And I would also like to know about your pipeline when it comes to your Music business. Are there any boy bands or girl groups that are scheduled to debut in year 2023?

[Foreign Language]

[Interpreted] Yes, the first financial question would be addressed by [ Mr. Kwan ], in charge of Finance. And then Ms. Kim, in charge of Music, will be addressing your Music questions.

[Foreign Language]

[Interpreted] Yes. Now on our nonoperating losses. In the second quarter, the number, I believe, is somewhere around KRW 39 billion minus. And of that, KRW 20 billion is related to impairment of a copyright. Every half year, we reevaluate the value of our copyright and reflect it on our books. And that amount this time stood at somewhere around KRW 20 billion, and about KRW 10 billion was to do with our M&A with Endeavor Content. So as the deal has been completed in the first quarter, that M&A-related expense of KRW 10 billion has been reflected in our second quarter numbers. So this is a one-off thing that would not occur again. And other loss numbers are related to more current items, such as donations and nonreceivable-related losses. So again, the KRW 10 billion related to M&A is a one-off thing that you won't be seeing a recurrence of. But in the fourth quarter, once again, with the copyright impairment reflection in our books, you would see a similar level of negative [ influences ] to our numbers amounting to somewhere around [ KRW 15 billion ] to KRW 20 billion.

[Foreign Language]

[Interpreted] Now answer from the Music business.

[Foreign Language]

[Interpreted] Yes, this is Hyun-soo Kim from Music business. First of all, thank you for taking interest in the Music business and for your questions. Well, as you correctly mentioned in your question, we're seeing back-to-back results -- good results for our Music business. We have an arena tour for JO1 and 101 [indiscernible], and there will be more than 20 rounds of concert or arena tours by these 2 groups. And yes, it's true that ENHYPEN has a global tour currently going on, and the global tour is titled MANIFESTO. So it's an ongoing thing, and it's the first global tour by ENHYPEN. And because it's the first time ever, we are currently still in discussion on how to share profit. Once things are finalized, we will be delivering the information to the market. And as for our pipeline with our Music business, yes, we do have plans for a new boy band/girl group debut in year 2023. ENHYPEN was discovered through I-LAND Season 1, and we have plans for I-LAND Season 2. And through I-LAND Season 2, we will be discovering and promoting a new girl group that will be making its debut in 2023. And we have also seen the birth of Kep1er through Girls Planet 999, and likewise, we are readying ourselves for Boys Planet 999. With Boys Planet 999, we're going to launch a boy band. And we're working together -- currently working -- in discussions and working together with HBO Max to discover Latin American singers as well. So we do have this program currently being readied. So with all these programs being planned, we will be seeing debut of boy bands and girl groups and also global singing groups from Latin America and other regions. And we also currently are in discussion and negotiation for a U.S. version Produce 101 as well.

[Foreign Language]

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

[Foreign Language]

[Interpreted] Yes, I got 3 questions. First is on TVING and Seezn merger. Well, will you be just simply merging with them to get more subscriber bases from KT? Or do you have any other strategy ready with the planned merger? And your projection for subscriber base stands at 4 million to 5 million by the end of this year. And when you closed the deal with Seezn, will this number be changed? So that was my first question related to a possible merger between TVING and Seezn. And my second question and third question goes to Studio Dragon. Well, the revenue -- or sales revenue, well, you projected a growth by about [ 50% ]. And I do realize that you have shown a [ similar ] result in Q2. However, my calculation gives us a number -- a growth number at 40%. So how -- will you be able to meet the [ 50% ] goal that you have stated? Will you be stepping up your efforts even further to promote more sales in the second quarter? So this is my second question that goes to Studio Dragon. And my third question also goes to Studio Dragon. Well, in the PowerPoint presentation, I do not see numbers of assets under construction. What is the number?

[Foreign Language]

[Foreign Language]

[Interpreted] So this is Ji-eul Yang from TVING addressing your question. Well, CJ ENM and KT, we are looking at various other strategic agenda items, including our works with TVING. And well, we are looking at collaborations with KT not only to increase our OTT subscriber bases or dominance, but we do have hopes for other synergy effects as well. And as for the number of subscribers, we will be maintaining our goal of over 4 million by the end of this year. And in order to meet this target, we are thinking of various strategic directions, including our works with Paramount+ and various telecommunication companies and also with Seezn. However, there is tough and -- there's competition out in the market as well. There is rapid consolidation now ongoing, and there could be other unseen variables that pop up during our move towards the end of this year. And the subscriber goal, I think we could make it, and we will be keeping a keen, active watch on the market to make things happen.

[Foreign Language]

[Interpreted] Now Studio Dragon.

[Foreign Language]

[Interpreted] Yes, our target of [ 50% ] in terms of sales revenue, well, you -- our current level is somewhere around 40% for the first half. And in the second half, we will [ begin to earn and supply ] into external OTT -- the original content for these OTTs. We'll be active. Supply will begin in the coming fall. And we also have a Hollywood project in place, The Big Door Prize. And with that, I think we'll be meeting the goal set at the earlier part of this year at [ 50% ]. And as for our asset under construction, last quarter number was at KRW 221.3 billion. In the second quarter, the number is more or less similar at somewhere around KRW 220 billion.

[Foreign Language]

[Interpreted] The following question is by [ Yoon Sang-hee ] from Myfirstasset Asset Management.

[Foreign Language]

[Interpreted] My question goes to Studio Dragon. Well, congratulations on your good, outstanding revenue numbers. But along with the improvement in the revenue numbers, I also see that your production costs rise. Is it because you pay more the actors? Or is it because of raw material price increases and other elements? Or is it because you have more concentration on original content?

[Foreign Language]

[Foreign Language]

[Interpreted] Yes, it's natural that the production cost rises with our revenue increase as well. However, having said that, our cost number, it has seen good positive movement. So [indiscernible] better. The production cost has seen a rise because of the increase in the number of titles that we produce.

[Foreign Language]

[Interpreted] [Operator Instructions] The following question is by Hyung-Min Park from Cape Investment & Securities.

[Foreign Language]

[Interpreted] There are concerns over the ad market in the second half. So could you give us your projection on the second half ad market. And now my second question is related to Endeavor Content and the PPA, purchase price allocation. I would like to know more about the PPA. And now my third question goes to Studio Dragon. You've mentioned your U.S. project Big Door Prize. But are there any other pending U.S. projects that you could talk about?

[Foreign Language]

[Interpreted] So the Content Solutions team will be providing you with the answer for advertisement, and the finance team will be addressing your PPA question. Studio Dragon will be then addressing your Studio Dragon question.

[Foreign Language]

[Interpreted] Yes. This is Seong-Hak Lee from Content Solutions.

[Foreign Language]

[Interpreted] Yes. Well, actually, we saw 5% growth Y-o-Y in the first half for our broadcasting advertisement. But in the second half, we believe things will turn more sour. As you're well aware, COVID still continues to be, and the war is been prolonged. And in fact, we're seeing a negative move when it comes to foreign currency exchange rates, and the interest rate is also on the rise. We see also a lot of pressure when it comes to raw materials. So globally, we'll be facing a dire economic situation. And with that, many companies will hesitate in their marketing spend. So all things being said, we expect the broadcasting ad market to see a negative growth of minus 2% on a Y-o-Y basis.

[Foreign Language]

[Interpreted] So given the situation to date, we do expect to see the broadcasting ad market to show a very limited growth of [ 1% ] for the year as a whole. So given the current broadcasting advertisement market situation, we are going to strategically engage in [ ad slot ] sales. So we're going to procure more share of wallets of our advertisers when it comes to digital and broadcasting advertisement. And we also will launch various promotion activities with the agencies in order to procure our ad revenue and also to get more market share.

[Foreign Language]

[Interpreted] So if I may brief you more on our ad offering strategy, we're going to concentrate more on performance ad offering because of the given bad or sour economic situation. So rather than focusing on brand advertisement, we're going to really promote the actual sales generation of our advertisers through our [ I-Ads ], which will give them a link to the company's portal, and also through live commerce through DIA TV and also through the usage of YouTube. So we have a lot of digital subsidiaries under CJ ENM, and we would be also enlisting their help. And for our [ anchor IPs ], it would be mainly the general ads that are aired -- or when [ anchor IPs ] are shown on the television. And for more tailored ads, it would be more of a branded content approach here.

[Foreign Language]

[Interpreted] So as was mentioned, we do expect the overall industry or the market to see a limited growth of somewhere around [ 1% ]. But with the above-mentioned strategies, we will be outperforming this number. So we do expect to see a high single growth number here. And as for our market share, we believe that we would be going beyond the 22% mentioned.

[Foreign Language]

[Foreign Language]

[Interpreted] Yes, now to address your PPA-related question, well, we have evaluated the PPA numbers, and we have yet to be delivered the final conclusion from the auditors -- external auditors. However, since many people are quite interested in this subject, I will give you a preliminary number. Well, the amount that will remain as goodwill stands at KRW 420 billion, and we've begun amortization on [ PPA ]. And in the first half, the reflected amount stands at [ KRW 3.4 billion ]. And compared to our operating profit numbers, this is not a big amount, not a concerning number. And in the second half, EC will begin in earnest with the delivery of the projects, and that will continue well into the future, starting from year 2023. So the profit contribution from Endeavor Content will more than offset what we have spent on PPA.

[Foreign Language]

[Interpreted] So last 2 questions for Studio Dragon.

[Foreign Language]

[Interpreted] Yes, there are contents that were created and produced in Korea that we'll supply to the global OTTs but others as well. We also have projects that will actually be produced in the U.S. to be delivered to the audience there. We have [indiscernible], who [ started in Pachinko ], work with us together in our project. And currently, we are in discussion with a platform for that project. And so we have begun planning and development of this project, and we are in various negotiation stages. And there are other titles that we plan to pitch next -- in the coming few weeks and in the coming few months.

[Foreign Language]

[Interpreted] Thank you very much for your time. We especially like to thank Chris Rice and Graham Taylor from L.A. and London for joining us despite the odd hours.

[Foreign Language]

[Interpreted] Thank you.

[Foreign Language]

[Interpreted] This concludes the Fiscal Year 2022 Second Quarter Earnings Results by CJ ENM. Thank you for your participation.