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 third quarter earnings results by CJ ENM. This conference will start with a presentation followed by a [indiscernible] session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2022 Third Quarter earnings release by CJ ENM.

[Interpreted] Good afternoon. This is Kay Choi of CJ ENM's IR team. I deeply thank the shareholders and analysts for taking part in our earnings release session despite your busy schedules. Now we will begin our earnings session for Q3 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. So today with us our management and heads of different business divisions, we have CFO; [indiscernible], EVP, [indiscernible], CSO, Young Kyu Kim; and Head of Content Solutions, Seong-Hak Lee. From IT business, we have [indiscernible]. From Pictures, Chang-Gun Koo and Music [indiscernible] and CEO of Studio Dragon, Ms. Jey-hyun Kim is here with us, too, as well as the TVING CEO, Ji-Eul Yang; and CEO, [indiscernible] from CJ ENM Studios. First, CFO, [indiscernible], who will give his remarks.

[Interpreted] Good afternoon. This is, CFO of CJ ENM. CJ ENM continues to enhance our global business competitiveness and OTT platform and thereby continued business growth. With fifth season and the establishment of CJ ENM studios, we are enhancing our content influence in the domestic and international markets. TVING is fortifying content and with merger pursuits with seasons continued subscriber acquisition. However, in comparison to our top line growth, there were much room for improvement with our profitability. Speedy business portfolio renewal was done to lead the changes in the content market. And with that, in 2023, the company is going to focus on profit and profitability enhancement. Profitability for each business unit will be fortified and we further will improve content and product hit ratio. At the end of October, there has been changes to key management positions, including the CEO. The company is now establishing strategic execution and detailed management plans for different business units for year 2023. We will be delivering you more details in our Q4 earnings session. The company will enhance profit growth approach and be very attentive to shareholder opinion. Thank you.

[Interpreted] Now on to the results presentation. Please note that CJ ENM's quarterly and yearly results presentation is based on K-IFRS consolidated numbers. The company will now present the Q3 2022 management results.

[Interpreted] Good afternoon. This is [indiscernible] from CJ ENM Finance. The consolidated revenue for CJ ENM in Q3 was at KRW 1.1785 trillion, which is a 37.4% growth Y-o-Y, but our operating profit at KRW 25.5 billion decreased by 70.9%. Thanks to TVING, content sales and blooming Music business, Entertainment business unit recorded a revenue of KRW 869.1 billion with KRW 19.8 billion in OP. Commerce recorded a revenue of KRW 309.5 billion with KRW 5.7 billion operating profit. The company will continue its global music business expansion in the fourth quarter and focus on TVING growth and TV advertising. Commerce business will see a strengthening of portfolio and focus on peak season. Page 4. Media Business Unit recorded a revenue of KRW 609.9 billion in Q3, which is a growth of 37.7% Y-o-Y, continuing its top line growth. Content hit ratio saw improvement. TV subscribers and content sales revenue recorded steep growth as well. However, with more original content and the company production cost increase and with the fifth season's loss, the business recorded a loss of KRW 14.1 billion. The business is focusing on TV ad [indiscernible] and TVING growth in Q4 based on IP competitiveness. Anchor IPs have been enhanced with Under the Queen's Umbrella, Crown and Queen Im Hwa-ryeong of tvN and Show Me The Money season 11 of Mnet. TVING will continue growth of subscribers with firm competitiveness of original content such as Work Later, Drink Now 2 and Island. Page 5, commerce. Revenue for the commerce business unit decreased 2.0% Y-o-Y at KRW 309.5 billion in Q3. OP decreased 78.8% at KRW 5.7 billion. Even with the increase in private brands with current growth in the TV commerce sector and staged consumer sentiment, TV GMV decreased. Profitability deteriorated with pressure from fixed cost, including platform commissions. Q4 will see an expansion of programming for high-margin products such as beauty and health supplements. With optimized portfolio, the business will aim to restore TV GMV. The business will continue to enhance the fashion PBs such as AtG, g studio and CelebShop edition and maximize the high season effect with launch of new FW products. Page 6, pictures. Pictures revenue at KRW 118.6 billion, so an increase of 258.2% over the previous year. With confidential assignment to international success, theater revenue increased 376.8% Y-o-Y. Ancillary revenue from Alienoid and fifth seasons overseas revenue rose, too. However, the lack of the domestic box office numbers for Alienoid and cost recognition with fifth season consolidation led to operating loss of KRW 100 million. The business will focus on profitability recovery with domestic temple title Hero and Grand musicals such as 42nd Street and Moulin Rouge! targeting the peak fourth quarter. Page 7, music. Music business recorded a revenue of KRW 140.5 billion, which is an increase of 113.5% Y-o-Y. Operating profit more than tripled at KRW 34 billion. INI and ENHYPEN's album sold well, leading to Lapone and Belift Lab and other labels painted top line growth. Concerts and convention live revenue led profitability. Global growth momentum will further strengthen with in-house artists to new album releases and concert tours in the fourth quarter. Kep1er and JO1 have released their new albums. Kep1er Japan and INI Japan arena tours are scheduled and ENHYPEN will have its world tour. The growth will continue with global concert expansion. Now we will be hearing the presentation from Studio Dragon.

[Interpreted] Good afternoon. This is CEO, Jey-hyun Kim of Studio Dragon. I will brief you on management's results for Q3 2022. Revenue in Q3 stood at KRW 228.9 billion, which is the best quarterly result to date. 7 new OTT-bound originals were reflected in our revenue, leading to a 97.2% growth Y-o-Y. Operating profit continued to grow at KRW 18.9 billion. Bottom line also saw an improvement together with top line and witnessed about 30% growth Y-o-Y. Contract renewal with Netflix is in its last stages reconfirming our content competitiveness. Numerous OTTs have long-term contract needs. And with that, we are accessing additional partnerships. This will prove to be an opportunity for the company to cement our sustainable growth structure. Our first Hollywood drama, the big door prize has completed reduction and has been partly delivered to Apple Plus TV in the quarter. Next titles are well under planning, development and production. Japanese local drama work has picked up speed, and we will put in our efforts to deliver you good news in the near future. Thank you.

[Interpreted] Now we will move on to the Q&A session. Due to time constraint, I please ask you to limit your questions to 3 each, centering on core issues.

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

[Interpreted] Well, I have 3 questions. The first question is related to your results. Are there results -- were there any one-off elements included? And if so, to what extent? And well, the next part of the first question is on your guidance number. You've given us a revenue guidance of KRW 4.8 trillion with the OP guidance of KRW 270 billion, well, does it still stand? This is my first question. And my second question is related to fit the season on TVING. You've mentioned in your past presentation that there will be profit contribution starting next year. So could you give us your outlook for next year's contribution from the 2 entities? So I know it's still too early, but if you could provide us with the guidance, that would be much appreciated. And now on to the third part of the question, which is to Studio Dragon. You talked about delivery of your title Big Door Prize. And you said you are readying yourselves for the next title or the next delivery. Well, will it be season 2 of the same title, Big Door Prize? Or will it be a whole new title? And my other question is related to your proportional recognition of production. Could you -- if you're doing so, could you please provide us with more color?

[Interpreted] Yes, if I may address the first question, which is related to one-offs. Well, I think, you're referring to the sizable nonoperating item that you see in the documentation that we provided. And my simple answer would be there were no one-offs. And you see a nonoperating loss number amounting to KRW 70 billion. Well, our equity method loss amounted to KRW 50 billion in the given quarter. And our net finance loss or expenses stood at minus KRW 15.5 billion. With the larger scale investments, our borrowings of the saw growth and our numbers were consolidated with the numbers of fixed season. And of course, on top of that, the rising interest rate also acted as a burden. Yes. If I may address your guidance-related question, well, there has been a disclosure made. We have downward adjusted our guidance numbers. The revenue guidance still remains the same at KRW 4.8 trillion. But our OP guidance has seen a downward adjustment by 42%. And the new number now announced stands at KRW 155 billion. The second half market conditions proved to be much tougher than what everybody else has anticipated. And with consolidated losses with fifth season and TVING, we had to downward adjust our guidance. And as was mentioned in our opening statement, while we are in the midst of coming off with the management plan to improve profit and this year turnaround in year '23. And pleased to understand that it is quite difficult to give you a number-wise answer today, but we will be giving you the directionality of the management. Yes. Well, I'll be talking more about a fifth season and CEO, Ji-Eul Yang would be addressing TVING-related issues. Well, the fifth season or the anticipation for the number of delivery this year stood at 14 titles, well, we expected the actual delivery to be slightly below. And the theater releases, the contribution were quite limited, too. But as was mentioned in our communication in the second quarter, with cooperation with us, we do hope to see more delivery going into the next year. We expect at least 20 titles to be delivered in year 2023. And next year's earnings with improvement from fifth season and TVING, well, next year's earnings will be driven by these 2 elements, the improvement with fifth season and TVING. Yes. Now TVING, please?

[Interpreted] Yes. This is CEO Yang from TVING addressing the question. Well, as you're well aware, in order to go for an optimal growth in year '21 and '22, with expansion of OTT market, TVING made both preemptive investments for original titles, and this has led to the number of subscriber growth. But this preemptive investment led to somewhat of a profit that rather want improvement. So in the early part of the year '23, we will be seeing tangible results with our merger with KTCs. And with that, I believe we have laid out the ground to enjoy the fruits of economies of scale. So starting next year, we will be seeing meaningful improvements to our profit numbers.

[Interpreted] Studio Dragon, please?

[Interpreted] So this is the asset provided by Studio Dragon. Well, Big Door Prize, will there be a season 2 of it? Well, Big Door Prize season 1 is to be programmed in the first half of year '23 and after seeing the results of season 1 when after that, we could think about the possibilities of the season 2. And as to the new titles that we are working on, well, remake -- Hollywood remake of the designers of -- well, we are currently in the last stages of discussion with the potential platform that is interested. And we will be working on about 5 titles, U.S. remake of our own titles. So we are in the pre-pitch phase of work with these 5 titles. And now on cost recognition in proportionate to production completion rate. Well, our standard changes on master delivery. So upon masters delivery, our numbers are recognized. As was mentioned during the presentation, we have hardly delivered some of the whole 10 episodes. And upon master delivery, our cost recognition will be done.

[Interpreted] Next question, please?

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

[Interpreted] I have 2 questions. So once again, the first one is related to your nonoperating loss numbers. I see that investment loss to your affiliates have been increasing for some time. Could you please give us more detailed information to -- related to it? And until on when will this loss continue? Does it continue to influence your nonoperating numbers next year as well? This was the first question. And now on to the second question, which is to do with corporate tax. I understand that corporate tax was not much of a burden until the first half of this year, but it has become a pressure starting in the third quarter and most probably in the fourth quarter as well. And I think it could eat into your profit numbers as well. So I would like to hear more detail on your corporate tax-related issues. And well, in your presentation, it was mentioned that there will be a stronger emphasis on profitability improvement next year. So could you give us a rough guidance as to how much?

[Interpreted] So in my previous answer, I told you that our nonoperating losses amount to KRW 70 billion, of which KRW 50 billion is with equity method loss. While the number in the second quarter was at KRW 30 billion. And of course, speaking about related companies, well, it's not -- well, we are not in a position to freely remark about the results of that particular legal entity. So please understand that we cannot provide you with detailed comments on that. But if you look at the financial market conditions, recently, there has been a lot of volatility. The currency move was also very volatile. The won to the dollar moved at the range of to 1,400 to 1,440 won to the dollar. Now it has seen a bit of a stabilization. And this company, it was really influenced by the fluctuations in currency. What should the current foreign exchange rates be maintained, I believe that their loss will be contained going into the future. And now moving on to the second part of your question, which was to do with corporate tax, corporate tax payment in the second quarter was at KRW 1.9 billion. In third quarter, the number rose to KRW 8.6 billion. This is, of course, on a consolidated basis. And if I may talk about CJ ENM, the legal entity CJ ENM. Well, based on first half results, there was an interim payment paid out. And this interim payment is based on last year's results. So of course, the number to be paid out and corporate tax was rather high. Well, the tax-related issue, it's quite a complicated one. So we would need to set up a second meeting for that. But as was mentioned in the presentation, the profit level this year isn't as strong as what we have witnessed last year. With that, we would not really feel a pressure from corporate tax payment. Since you've asked us more color or guidance on the profit level for year 2023. Well, I will give you a little bit more detail. As you have stated, we have seen somewhat of a less than desirable opening number for year 2022. And at the earlier part of this year, it is true that many investors express their concerns over production cost. So I believe that giving you growth somewhat of a guidance from year '23 and the next -- of course, next year's results would be much important. And on a standalone basis, on an individual basis, the results still remains strong for the company. But since we have given you consolidated numbers, well, the results from fifth season and TVING had an average effect amounting to KRW 130 billion. So with the improvement of the 2 subsidiaries next year, we will be seeing improvements. Yes. Well, fifth season and PMI is successfully over, and I can only give you a rough band that well, it's not been finalized yet, but we expect the number of titles to be given by fifth season is somewhere around 14% for this year. Next year, we do expect to see about 24 to 27 titles from fifth season. And that, of course, will contribute to our top and bottom line improvements, while the U.S. OTT market size is KRW 50 trillion. And with fifth season, we have made full fledge entrance into this enormous market. And we do hope to see contribution from fifth season starting next year. And if I may talk about TVING, well, it's true that there was some loss related to TVING's numbers, but there were also very positive results from the business such as subscriber number increase and content pooling and user perception improvement. And the Fair Trade Commission of Korea has given the green light with the merger with season. And with that, we will be seeing migration of subscribers in the fourth quarter and in the first half of next year.

[Interpreted] Next question, please.

[Interpreted] The following question is by Lee Hazel from NH Investment Securities.

[Interpreted] Yes. My questions are directed to Studio Dragon. Well, first is on amortization or depreciation of intangible assets. I see that there has been an increase by KRW 10 billion. Could you please elaborate on the increase? And secondly, well, in your presentation deck, you have written limited profitability with OTT originals. Is it because your Big Door Prize is the first season that you've said limited profitability? Or is it because of your recognition system or your revenue recognition system? And you said cost was recognized according to delivery. Is margin recognized in the same way? Or is it more towards at the time of airing.

[Interpreted] Yes. As to your first amortization and depreciation question, well, they have been concording with -- together with the OTT in the third quarter, and that has led to the increase. Yes, and about the limited profitability with original. That's not really to do with a particular type to, per se, Big Door Prize. Well, we've seen OTT-bound originals increased in the third quarter. And to some OTTs, we provided them with our first title. And with this entrance to new platforms, the margin rate wasn't that high. However, the platforms that receive their content, they are very satisfied with it. So with that, going into the future with increased volume, we will be seeing an improvement in that profitability as well. We are currently in discussion with the diverse platforms. And the results will be reflected in our next year's numbers. And now our margin recognition, as for the revenue recognition, it changes on master delivery.

[Interpreted] Next question, please.

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

[Interpreted] One simple question or to Studio Dragon. Well, has the contract with Netflix been renewed and are the contract terms better?

[Interpreted] Well, we are almost at the end, we're almost -- we have almost -- we are at the close to the final stage. We are working on fine-tuning the details. And even though we might -- well, we -- even if we don't sign the deal in 2022, for the titles that will be provided in '23, we will go by the conditions that are being renewed. And we're quite pleased with the terms and condition changes.

[Interpreted] Next question, please.

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

[Interpreted] Yes. I have 3 questions directed to Studio Dragon. Well, I see that your overseas number has seen an increase by KRW 60 billion or more for the third quarter. Well, I know that companies do not provide baseline numbers per channel or per OTT. But well, what is the kind of contribution of other channels, other new channels other than TVING and Netflix when it comes to OTTs? And my second question is really to your profitability rate, you've mentioned that it is due to OTT news in regional cost or profit rate slightly went down despite the top line growth in Q3. So could you give me a comparison of the new project profitability versus the old one? And well, with more OTTs, well, what is the profit rate associated with new OTTs? And my third and last question is related to your asset and construction. What's the number?

[Interpreted] Yes, if I may address your first question related to our overseas revenue. Yes, we have seen more additions of newer platforms in the third quarter for overseas OTTs revenue number increased. But the. But the OTTs, well, if you look at our business with them, it was quite well spread out. So there is no concentration with the specific OTT. That was my first answer. And now moving on to the second part of your question, relatively weaker probably compared to our top line growth and the comparison between our new projects and existing projects. Well, relatively the newer projects are associated with lesser profit. But it's not for every project. So there are different profit rates associated with different projects. So there is no clearcut between the older projects and the new projects when it comes to profit rates. And it's true that we have seen the margin -- some margin deterioration compared to the previous quarter. It's related to our library sales. Yes, we did sell our library titles to Amazon, but compared to the previous seasons, well, the number was rather wanting. And compared to our first window sales, our second window sales have seen a slight decrease, so leading to somewhat of a deterioration with our profitability. And then our asset and construction site is KRW 200 billion is to do with preproduction for our projects with platforms for next year.

[Interpreted] So we do not see any questions lined up in the queue. So I think it's okay, could we the session. I thank the shareholders and analysts for being with us today during our third quarter year 2022 earnings session. Thank you.

[Interpreted] This concludes the fiscal year 2020 third quarter earnings release by CJ ENM. Thank you for your participation.