Studio Dragon Corporation (A253450) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2020 second quarter earnings resulted by CJ ENM. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 second quarter earnings resulted by CJ ENM.

[Interpreted] Good afternoon. This is [ Kay Che ] from CJ ENM IR. First of all, I thank the shareholders and analysts for their participation. Now we will begin the earnings release of CJ ENM for the second quarter 2020. Please note that the financial and management results presented today have yet to undergo any external auditor's review and, therefore, are subject to possible changes. Today, here with us, we have CEO, Heo Min-hoi; and COO, [ Kap-mun Song ]; and the heads of various department and division. We have Executive Vice President, Mr. [ Park Yong-Ju ]; and also an EVP, Mr. [ Hong Ki-Song ]; and from Media, we have Lee Myung-Han; from Content Solution Media, we have Lee Seong-Hak; and from Commerce, we have [ Chong Yong-Chan ]; and from the Pictures business, we have Mr. [ Jin-hee ]; and from Music, we have Mr. [ Oh Gong-Ju ]; and we have CEO Kang Chul-Gu from Studio Dragon. First, CEO Min-hoi Heo will brief us on major results and business strategies.

[Interpreted] Good afternoon. This is Heo Min-hoi, CEO of CJ ENM. CJ ENM was able to minimize external shocks through concentrated risk management despite the decrease in broadcasting advertisement and steep decline in [ TSS ] content and live revenues due to the ongoing COVID-19. Difficult market conditions continued in the second quarter as well, but the company has begun its turnaround, thanks to the growth of commerce and expansion of digital. CJ ENM will enhance its profitability by further improving content hit ratio and strengthening product portfolio in the second half. We will actively address the digital environment to expand our growth engine. As for drama, the company will work on improving viewer ratings and trend-making. New non-scripted format planning and programming will be strengthened. Movies will resume new releases, and the company will focus on the second half lineup. Music will aim for new growth through new IP planning. Commerce will continue its top and bottom line growth based on TV product competitiveness. Going forward, CJ ENM will do its best as a media commerce company [indiscernible] to the global market. In concluding, I deeply thank the shareholders and analysts for their time. Now the results presentation. The quarterly and whole year financials are based on K-IFRS and on a consolidated basis. With the sales of CJ Hello, Y-o-Y comparisons are pro forma estimates. Now CFO, Baek Jae Min, will brief us on the second quarter results.

[Interpreted] Goof afternoon. This is CFO Baek Jae Min of CJ ENM. The consolidated revenue of CJ ENM in Q2 was at KRW 837.5 billion, which is a decrease by 16.7% Y-o-Y. Operating profit at KRW 73.4 billion decreased by 16.1%. This is due to the still sluggish broadcasting advertisement and the revenue stop from theater and music concert businesses with the ongoing COVID-19. However, with the continued high growth of digital sales and commerce profit growth, quarterly operating profit has begun a turnaround. Profitability improvement that defied external influence is being positively reviewed. Profitability will further be improved with added content and product competitiveness in the second half. We will restore TV ad and expand digital business. The company will focus on mobile-centered digital capabilities when it comes to our PB-focused commercial business. The company will aim on profit improvement of our movie and music businesses through new box office releases and IP expansion. Page 5, Media. Media recorded revenue of KRW 406.3 billion and OP of KRW 24.9 billion in Q2. With the slow TV advertisement market, operating profit decreased compared to last year. But quarterly turnaround and profit rate improvement were a positive factor. Digital revenue continued to grow with the increase in paying TV subscribers and YouTube traffic, content sales of titles, including Hospital Playlist and The King saw growth. The company will continue building profitability based on digital and content sales. We will also add to our profitability through efficient per-episode production costs, co-airing and new ad products. Commerce on Page 6. Commerce in the second quarter recorded KRW 376.2 billion with the best ever operating profit number of KRW 49.8 billion. Profit-centered portfolio strategy and enhanced PB strategy led to growth. In particular, the strengthened high-margin product programming, coupled with full decreases in low-margin ones, helped the improvement. New brand launches with a focus on fashion are ready for the second half. With added sophistication in logistics and inventory management, the business will continue to focus on profit for major product categories. Digital shop-in-shop and mobile eTV programming will be enhanced to continue our growth in the digital space. Page 7, Pictures. Pictures revenue in the second quarter was at KRW 12.5 billion with an operating loss of KRW 3.5 billion. With the stop in domestic and overseas new box office releases, [indiscernible] revenue plummeted and loss was inevitable. However, the business is planning new releases with titles such as Deliver us from Evil, Collectors and Hero. The business will also aim to see a recovery with the release of in-house projects in Vietnam, Thailand and Turkey. Page 8, Music. Music recorded a revenue of KRW 42.5 billion and an operating profit number of KRW 2.1 billion in the second quarter. With COVID-19, concert came to a halt, but digital singles and album sales of IZ*ONE and Heize continued a strong growth path at KRW 33 billion. The company will more actively address the changed market in the second half with untact and digital concerts. IZ*ONE and JO1 will also enhance their overseas activities. The company will enhance this business with preparations for I-LAND Part 2 debut and with more new groups and artists. Continuing, we'll be hearing the report from Studio Dragon.

Yes, the report -- following report is from Studio Dragon CEO, Kang Chul-Gu. Revenue of Studio Dragon in Q2 was at KRW 161.4 billion with OP of KRW 16.9 billion. This is a growth by 25.9% and 56.3%, respectively. With the results from The King and the overseas sales of titles, our sales increased 41% Y-o-Y, leading our top numbers. With strong titles such Stranger 2, Record of Youth and Startup lined up for the second half, we have expectations for good viewer ratings. We will continue our overseas sales, including Netflix original, Sweet Home. Now we will take questions. [Operator Instructions]

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

[Interpreted] Yes. I have 3 questions. First, concerning production costs. Second is related to your advertisement outlook. And third is related to your new untact business. Now onto the first question which is related to your production costs. I know that you have mentioned the decrease of your production costs by 10% to 15% compared to what you have executed last year at KRW 110 billion. And now we have the result of Q2. And how did you save on the production costs so far? And was the production cost decrease thanks to the lack of tentpole products such as Arthdal Chronicles? Or was it across all the titles that you have produced so far? And was the decrease in production costs after May, after your last conference call? Or was it an effort that happened throughout the year? And now onto the second question, which is related to your advertisement. I know and I could surmise that your second quarter results were really bad. And I do think that there is some kind of recovery in the advertise market starting June to August. And I know that you have a very high baseline from last year. So what is your outlook for the advertise market starting third quarter? And how will it reflect on your production costs? And now the third question, related to untact business. Well, COVID-19 hopefully will be over in the future. And with that, you'll see a pickup in your theater businesses and also your music businesses. But the new untact business, I believe, will stay even after the end of COVID-19. So if you have any ideas to share when it comes to your future untact business, could you please do so with investors?

[Interpreted] Yes. The first and the third question will be addressed by CFO Baek. And the second question will be addressed by Mr. Lee Seong-Hak from Media.

[Interpreted] So in the earnings call for the first quarter this year, we did mention a 10% to 15% decrease in our production costs compared to the previous year, and we are on track, and we are in line with what we have planned. And we are seeing the results even in the second quarter, but the effort will -- and this result will become more visible in the second half of this year. And -- well, you pointed out the lack of tenfold titles, but it's not only due to that factor. We have strategically planned our business to have more co-airing and lesser spending per episode. And we also have a high concentration on programming for titles with a high hit ratio. So our strategy all in all has led to a lower production cost. In the second half, we will also seek a very balanced production cost execution in consideration with the advertisement market and our IP.

[Interpreted] Yes. This is Lee Seong-Hak from the Media business division addressing your question. Well, we've initially anticipated an upper-teens level decrease of broadcasting advertisement in year 2020. But with the ongoing pandemic, the advertisers have been more conservative in their execution. So the decrease we are seeing is at the mid-20% level. And on top of that, we are not witnessing a strong signal when it comes to economy recovery, and there is more emphasis on digital marketing. And with that, well, the second half is also expected to be a difficult half. And with that, CJ ENM will also focus on the digital ramp. So on a Y-o-Y basis, our paying TV subscriber number has increased by 66.2%, and our YouTube traffic has seen an increase by 170.4%. This is an illustration of how strong digital business is. But we will also be working very hard and diligently on TV ad. We will add more sophistication on the performance measure matrices, and we will be launching new advertisement products so that we increase the pool of our advertisers and give more efficiency to their spend. And with that, I believe that we will be able to restore our market share and enhance our TV advertisement products and results. Yes. Now to address your third question. Well, our digital revenue in the second quarter grew more than 15%. It was mainly led by paying TV subscriber number increase and our increase in YouTube traffic, which was an increase by 170.4%. And the paying subscribers for TV, as was mentioned, has seen an increase by 66.2%. And we did have a program called KCON:TACT in the second quarter. And it was in line with the untact trend. It was an online concert, and it started from June 20 and lasted for a week. They were logged in from 153 nations, and more than 7 million people logged in to view this program. So the KCON, it transcended time and the limitation of space. It also added to our brand awareness, and it has established itself as a new business model for the company. So the digital business and our OTT TV and untact concerts, we've tested various possibilities in first half, and those has led to a very positive result. And we do have plans for an untact concert in the second half as well. We will be continuing with our endeavors.

[Interpreted] [Operator Instructions] The following question is by [ Kim He-Jae ] from [ Hegin Securities ].

[Interpreted] Yes, 2 questions. First is related to the OTT growth. You have your alliance with JTBC, but do you have plans to form other forms of alliance with other entities? That's the first question. And the second question is related to your Commerce business. The Commerce business has given you the best results ever. However, your GMV numbers have a decrease by 5%, but still, your profit level is the best ever. So why was this possible? And is this result sustainable?

[Interpreted] Yes. The first question related to OTT will be addressed by Mr. [ Chu Dae-Yeon ] who leads the TV business. And the next question for Commerce will be led by Mr. [ Chong Yong-Chan ].

[Interpreted] Yes. This is [ Chu Dae-Yeon ] from the TV business. Well, as you rightly mentioned, we do have many priorities from other entities for a future partnership other than JTBC. We are currently discussing various possibility with domestic and overseas SIs and FIs. But please understand that we are not in a position to disclose any names here. But we do get a lot of interest expressed by lots of SIs and FIs. And for future added partnership, we're quite optimistic of the possibility.

[Interpreted] Yes. This is [ Chong Yong-Chan ] from the Commerce business addressing your question. As you've mentioned, our GMV has seen a decrease by 5%. It's because we have tidied up some of the lesser-performing businesses related to catalog business and department store business and also automobile service-related businesses. So yes, it's true that our GMV has seen a decrease, but if you look at our revenue numbers, it has been an increase by 5% and our OP number has increased by more than 30%. It's because we have concentrated on the health supplement goods and living products, which are associated with high margins. And our heavy focus on PB fashion also gave a stellar result. So on one hand, we worked on improving our margins. And on the other hand, we worked on our expenses and spending. We stopped further spending on the top line growth. And this has led us to an improvement in our SG&A.

[Interpreted] The following question is given by Oh Tae-wan from Korea Investment & Securities.

[Interpreted] Yes. The first question for your Commerce business is you've talked about your margin improvement and your margin and your OP has seen an [ intense ] double-digit improvement. Do you think another double-digit improvement would be possible in the second half? This is a question for Commerce business. And how will your platform commission influence? And do you have any outlook for your platform commission? And now the second question is addressed to Studio Dragon. So in the second half, would you have any titles that are bound for non-captive channels aside from the titles that would go to Netflix?

[Interpreted] So the home shopping business, if you look at historic results, the second half was always better in terms of profitability compared to the first half. It's because there is a high demand for fashion products in the third and fourth quarter, and also the consumers tend to stock up on their health supplements. And -- well, apart from historic trend, in the second half, we are going to even intensify our private brand fashion launches, and we are also going to improve our portfolio for health supplements. And as for the second part of your question, which involves the platform commissions, we're currently in discussion with the platform players. So please understand that we are not at liberty to disclose any details here.

[Interpreted] So this Kang Chul-Gu from Studio Dragon speaking. And your question was our supply to non-captive customers. I cannot give you the exact timing now, but we have 2 titles being ready, one for the terrestrial station and one bound for Chinese OTT.

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

[Interpreted] Yes, 2 questions. First is related to your advertisement. Well, those monoline digital advertisement players have witnessed the best results ever. But having said that, you also have the traditional TV advertisement. So on a blended basis, your business results from Media is [ that ] good. And in the second half, should TV ads really pick up, then how would the performance of YouTube and [indiscernible] contribute? Well, I know that it's really difficult to carve it out, but with [indiscernible] growth for your TV ad, well, what was the contribution from your digital advertisements? Is it significant? Would it make a difference? This is the first question. And the second question is related to Studio Dragon. I think your ASP numbers rise. And now there is an index system for ranking. And so it's a very objective ranking system made possible by the use of an index. And in the second half, do you have any possibilities for improvement?

[Interpreted] Yes, I will address the first question, which was related to our advertisement. Well, there is always questions concerning our traditional advertisement tools and digital advertisement tools. And what I would like to highlight in the second quarter results is, well, we have the corona or COVID-19 pandemic situation hurt our first and second quarter numbers. So while seasonality, it wasn't much of an influence. It was an influence pandemic -- it was an influence from the pandemic. And our TV ad recorded a negative 30% growth, both in the first and the second quarters. However, having said that, our media margin has seen an improvement by 6.1%. It was thanks to TV ad recovery somewhat and also thanks to the revenue from our digital business and content sales business. Well, and as you've mentioned in your question, well, it does have tangible contribution to our earnings numbers. But compared to the monoline platform companies, well, our digital business is still in its infancy, is in its flexibility stage. So our one-on-one or orange-to-orange comparison here is not really possible.

[Interpreted] Yes. This is Studio Dragon, Kang Chul-Gu speaking. In the first half, we had healthy library sales as well as an improvement for our average selling price for new titles. And in the second half, we will be executing on Netflix for overall deal, and we will be providing them with the original suite to home. And with that, our content is gaining a global competitiveness, and this adds to our sales numbers. And Accidents -- or Crash Landing on Love and It's Okay to be Not Okay, these 2 titles, they will be adding new value-add to our numbers.

[Interpreted] [Operator Instructions] The following question is by Park Sung-Ho from Yuanta Securities.

[Interpreted] Yes. I've got 3 questions. First is related to your Commerce business. Well, should digital contribute more to your Commerce business, would there be a difference in margin with the mix change? And the second question is on the directionality of your TVING and OTT business. Well, through TVING, your OTT business, do you hope to create a Korean wave, the global market bound OTT? And now the third question is related to your nonoperating loss. I see the number here is larger than usual. Could you give more detail on your nonoperational losses?

[Interpreted] So yes, our mobile business is leading top line growth and the margin associated with online is lesser than for other platforms. But when it comes to TV high-margin O shopping-related products, we do have a multichannel strategy in place, so mobile is an important platform. Typically, in the industry, mobile margin rate is only half that of TV margin rate [indiscernible] and mobile margin close to 80% of our TV margins.

[Interpreted] So this is [ Chu Dae-Yeon ] from TV addressing your TVING-related question. Well, TVING, well, we do have a global content competitiveness, well, the business by the hugely successful movie title Parasite, and our Studio Dragon works with Netflix. We do have a global-based content competitiveness. But to become a true global OTT player, it will require a lot of resources, both in terms of finance and also time. And there are lead companies that are way ahead of us. So we want to be more practical, and we want to stick true to our reality. And now to the third question was -- which was on nonoperating number. So our nonoperating loss on a Y-o-Y basis has seen a difference by KRW 22 billion. It's mainly because of 2 factors. The first is copyright impairment amounting to KRW 18 billion, and the other was related to interest rates at KRW 4 billion. And in preparation for uncertainties with the onset of pandemic or COVID-19, we wanted more cash with us. That is why we have added on KRW 4 billion in short-term [ volumes ]. And if I may give you more color on the KRW 18 billion copyright impairment loss, well, as was mentioned, every half year, we do an impairment test on titles that give no more profit. And according to that test, we had infiltrated KRW 18 billion worth of copyrights. So going forward, we are going to conduct impairment test on nonprofit-making titles every half year, and we'll have the numbers adjusted accordingly.

[Interpreted] [Operator Instructions]

[Interpreted] Since there are no further questions, we will conclude our earnings session here. Thank you once again for your time, and this concludes 2020 Q2 earnings report from CJ ENM. Thank you.

[Interpreted] This concludes the fiscal year 2020 second quarter earnings resulted by CJ ENM. Thanks for the participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]