Studio Dragon Corporation (A253450) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is [ Kae Che ] from CJ ENM's IR team. I thank the shareholders and analysts for attending our earnings presentation. We will now begin the results presentation of CJ ENM for the third quarter 2020. Please note that the financial and management results presented today have yet to undergo an independent auditor's review and could be subject to future changes. Today here with us, we have CEO, Heo Min Heoi; and COO, [ Kang Ho-seong ], and the heads of different business decisions. So we have Mr. [ Park June-Hyung ], Executive Vice President; and Executive VP, [ Hong-Gye Sung ]. And from media, we have Mr. [ In-young Han ]. And from also media contents, we have Mr. Lee Seong-Hak. From Commerce business, we have Mr. [ Chong Young Chan ]. From Pictures business, we have Ms. [indiscernible]. From Music business, we have [ Oh Byung-Ju ]. And from Studio Dragon, we have CEO, Kang Chul-Gu. And we also have CEO, Yang Ji-Eul from TVING. First, the CEO, Heo Min Heoi, will break us on major results and buses strategy.

[Interpreted] Good afternoon. This is CEO, Heo Min Heoi of CJ ENM. The TV ad market, theater and live revenues, including that from concerts, continue to be sluggish with the ongoing influence of COVID-19. However, the company was able to realize profit growth based on content and commerce competitiveness. In particular, we are fast enhancing our digital strategy. The digital sales of our media business stood at an accumulation of 21.9% in Q3. And digital sales of commerce also grew to 45.4%, which is a much faster growth than what we have seen last year. Thanks to the shareholder support, the spinoff of our OTT TV has been successfully completed. And through subscriber expansion and with enhanced content, it is ready to go into a premium platform. The media business is seeing clear signs of positive anticipation and viewership improvement. New scripted and nonscripted format will continue their success in Q4. With picture strategy to minimize risk and with new music artists, these businesses will also aim for new growth. The Commerce business will enhance TV competitiveness and is accelerating their strategy to further fortify mobile commerce. As is disclosed, the company has completed its strategic stock swap with Naver. Through active business collaboration between the domestic #1 platform and #1 content business, we will maximize synergy. Going forward, CJ ENM will do its best as a media commerce corporation [ that provide ] premium content to the global market. I thank the shareholders and analysts for their time. Thank you. Now we will give you the results. The quarterly and yearly results [indiscernible] K-IFRS consolidation numbers with sales of CJ Hello, Y-o-Y comparisons are on a pro forma basis. CFO Baek will walk you through the presentation.

[Interpreted] Good afternoon. This is Baek Jae Min of CJ ENM. The consolidated revenue for CJ ENM in Q3 was at KRW 798.6 billion, which is a decrease of 12.2% Y-o-Y but an increase of 17.9% Y-o-Y with operating profit at KRW 71.0 billion. COVID-19 continues to influence TV Ad and live revenues, but Media and Commerce digital revenue continues to grow rapidly. Through efficient product cost -- production cost execution, the Media business recovered profitability. The Commerce business, with a focus on PB, led to outstanding profit growth. Music business continues to see improvement in profitability, contributing to overall growth. The Media business will continue to add content competitiveness and popularity and enhance digital business. Commerce will focus on F/W product programming strategy and also enhance mobile product competitiveness. The Pictures business will continue to strengthen in-house production, and Music will focus on in-house artist-nurturing strategy. Page 5, Media. Media revenue, at KRW 370.6 billion, saw a decrease of 13.2%. However, operating profit, at KRW 29.3 billion, saw an 82.1% improvement. TV Ad saw negative growth of 17.0%, but the digital revenue continued its fast growth at 34.4%, including the 34.6% growth of TVING paid subscribers. Production efficiency increased with the per-episode production cost cuts and co-airing. With that, operating margin increased 4.1 percentage points over the previous year and recorded 7.9%. In the coming quarter, we will also renew our efforts with Start-Up, True Beauty and other nonscripted formats. And we will also be working on digital brands. Page 6, Commerce. Third quarter Commerce revenue, at KRW 344.3 billion, increased 2.5% Y-o-Y. And OP, at KRW 42.4 billion, increased 44.2% over the same period. There was a focus on contact-free-related programming strategy especially in the food and living categories. Digital revenue continued its rapid growth at 24.7% Y-o-Y. Thanks to The AtG, Secret and ODENSE, Private Brand grew 12.8% in terms of GMV. With a strategic focus on higher-margin categories, OP margin increased 3.5 percentage points to 12.3%. There will be stronger attention on fall/winter portfolio for categories including fashion, living and electronics in Q4. PB lineup will be enhanced in areas such as fashion and sports. Mobile platforms such as Flagship Store and Shock Live will be upgraded. And with expansion of digital-only products, our digital strategy will be accelerated. Page 7, Pictures. Pictures reported a revenue of KRW 36.9 billion with operating loss of KRW 4.1 billion. Deliver Us from Evil recorded an attendance number of 4.36 million people, but the overall downturn continued, leading to slow Box Office and musical numbers. Going forward, in the fourth quarter, we will also be focusing on project risk management, and we will also be responding to the fast-changing market conditions. In the month of November, we have planned to release Collector; and in December, Seobok. And we will be focusing on in-house planning and production. Page 8, Music. Music revenue was at KRW 46.9 billion with OP of KRW 3.5 billion in Q3. Live revenue including concerts revenue rose, but online including IZ*ONE concert continues. Thanks to IP library sales, album and single sales was at a sturdy number of KRW 40.7 billion, leading profitability improvement. New album release of IZ*ONE scheduled in Japan and Korea in the fourth quarter and Enhypen is ready for a successful debut. Going forward, the music business will continue to improve profitability with a focus on core business areas with artists, albums and singles. Now we will be hearing a presentation from Studio Dragon.

[Interpreted] I will brief you on Studio Dragon Q3 results. With ongoing COVID-19, the number of titles produced in Q3 decreased. There was also a high baseline effect with last year's Arthdal Chronicles and Hotel Del Luna. With these influences, revenue decreased 19.0% Y-o-Y and reported KRW 106.3 billion. However, our library-based sales to Chinese OTTs and sales-type improvement and production cost efficiency greatly improved profitability. Our operating profit increased 46.8% Y-o-Y at KRW 16.0 billion. In Q4, we will improve success rates by using webtoon IPs such as True Beauty, The Uncanny Counter and Sweet Home. In the case of Sweet Home, the title will be volumed up as Netflix original and lead the overall top line growth. At the same time, we will continue our efforts in library sales and enhance production cost process management and bring about fundamental business improvement.

[Interpreted] Now on to the Q&A. [Operator Instructions]

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

[Interpreted] Yes. My question is related to your content sales to the Chinese OTTs. Is it the old type of library sales or as you've mentioned in the past of supplying 2 new original content, 1 by the end of this year and 1 in the earlier part of next year? So the Chinese OTT content sales, are you referring to the 2 titles that you've mentioned in your previous meeting or is it just old title library sales? And if possible, could you give us a number of titles that are to be sold to the Chinese OTTs? And could you, if possible, elaborate on the size of the deal? And my second related question is do you have other similar contracts with other global OTTs than the Chinese one.

[Interpreted] So this is Studio Dragon's CEO replying to your question. So the Chinese-bound titles, they are not original. There are 2 library titles, and we have recognized the sales as our revenue. And please understand that I am not at liberty to disclose the amount. And as for our work with other global OTTs, as was mentioned, we are currently consistently pitching to other global OTTs. We have yet to see a tangible physical result.

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