Studio Dragon Corporation (A253450) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Kay Choi from CJ ENM's IR team. I sincerely thank the shareholders and analysts for their attendance. We will now begin the Q2 2021 earnings release session of CJ ENM. 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 this review. Today here with us are CEO, Ho Sung Kang; and Deputy President, [ Sang Yap Lin ]; and heads of different business divisions and units. Let me introduce the participants to you. We have here Mr. Chun Kyu Park, our CFO; [ Eu Jin Hee ], EVP; and Mr. [ Young Kim ], Content IP Head; and [ Ki Sang Ho ] from IP distribution. From Content Solution, we have Mr. Seong-Hak Lee; and from Commerce, Ms. [ Hee Ting Kim ]; Features and Drama is represented by Ms. [ Chin Lee Che ]; and Music by Mr. [ Sang Su Kim ]. From Studio Dragon, we have CEOs, Chul Ku Kang and Young Kyu Kim. The CEOs from TVING, we have CEOs, Ji-Eul Yang and [ Young Han Pi ]. First, CEO, Ho Sung Kang, will present our major achievements and strategy.

[Interpreted] Good afternoon. This is Ho Sung Kang, CEO of CJ ENM. The company continued to grow its profit in the second quarter by enhancing content competitiveness and accelerating the digital shift. Our media business recorded the best operating profit ever back to back, leading the company's growth. Growth was prominent in traditional TV business as well as new businesses such as digital ads and OTT. TV ads in the first half of the year recorded a rapid growth of 27.6%. Digital revenue grew 45% with media revenue growth. The strategy to expand premium IP and strengthen co-branding proves very effective as did the strengthening of CMP-based media solutions. With strong growth of live commerce and branded content, digital business also added much to our top and bottom line growth. With more original content and stronger sports lineup, TVING continues to see subscriber number increase, leading our digital distribution strategy. Paid TV subscribers in Q2 continues to grow strong at 43.6% Q-on-Q. That will be 86.3% on a yearly basis. Indications for traffic also look healthy. In the second half of this year, the company will continue to grow the subscriber bases and position TVING as the representative concept of Korea. CJ ENM will continue our first half record operating profit numbers in the second half as well. We will focus on profitability of all our businesses and fortify digital transformation innovation and outstanding competitiveness. Therefore, as of this call, the company has revised our management guidance. Revenue target at KRW 3.8 trillion remains the same, but our guidance for operating profit number has been revised up by 20% to KRW 300 billion, signifying our focus on -- in our profitability. We will continue to do our best in the second half to overachieve our goals. I do thank back the shareholders and analysts for your time. Thank you. Now we will move out here the presentation for our second quarter 2021 results.

[Interpreted] Good afternoon. This is [ Song Luk Kang ] from CJ ENM. The consolidated revenue for Q2 recorded KRW 979 billion, which is at 8.4% growth Y-o-Y. Operating profit at KRW 85.8 billion grew 16.9%. Revenue for entertainment recorded KRW 550.6 billion and operating profit, KRW 55.9 billion. Commerce revenue was at KRW 357.4 billion with operating profit of KRW 29.9 billion. The company will continue strengthening content and cost competitiveness as well as our digital business in the second half. We will maintain our media profitability through TV ad and digital sales. Commerce business will be fortified with private brands and mobile pipeline. The company will add more diversity to feature these releases and distribution strategy. And music will aim for growth with expanded lineup of new artists. Page 5, Media. Media BU recorded KRW 456.4 billion in revenue and KRW 57.7 billion in operating profit, which is the best result ever. With good performance of content and strength in media solutions, TV ads rapidly grew at 30.1%, supporting profitability. Content sales also contributed much as did original content led to subsequent achieving subscriber increase. This and expanded branded content sales led to digital sales growth of 54.6%. The company will enhance each channel's content competitiveness and anticipation and build a stronger library for TVING. The platform will carry tvN scripted and nonscripted formats. And next, we'll also see added channel competitiveness with new programs such as Street Woman Fighter and Girls Planet 999. TVING will continue to expand its subscriber bases with already popular nonscripted entertainment format that creates good traffic and also with library expansion of dramas and some programs. Page 6, Commerce. Commerce in the second quarter recorded a revenue of KRW 357.4 billion with KRW 29.9 billion in operating profit. GMV of TV commerce for categories such as home appliance and beauty decreased. But with stronger drive in mobile, digital GMV grew steadily. Sales of private brands also increased, accounting for 14.2% of our GMV. However, due to mobile platform strengthening measures and one-off SG&A expenses related to the launch of [ One Star ], this led to the decrease of OP at KRW 29.9 billion. The business will increase its fashion, beauty and living product portfolio and inspire branded living commerce -- live commerce. 35- to 54-year-old new customers will be targeted in our expansion plan. And with stronger digital product offering and marketing, mobile platform will see added competitiveness. Page 7, Pictures. Pictures business recovered in the second half with revenue of KRW 28.8 billion. COVID-19 continues, and the business is diversifying its distribution strategies, including simultaneous releases at theaters and OTT platforms. With [ Topo ], the business tried a new distribution strategy of simultaneous releases at theaters and TVs. Despite the pandemic situation, hard hits recorded in a terminated attendance number of 950,000. However, with full-fledged box office recovery being delayed, the business recorded an operating loss of KRW 4 billion. The business will respond more flexibly to deal with the situation in the second half and accordingly establish our lineup. At the same time, we will continue our distribution diversification strategy for TVING and use the simultaneous releases, that the business actively addressed market changes by adding diversity to TVING's mid-form drama production, genres and formats. Page 8, Music. Music revenue at KRW 55.4 billion grew 53.8% Y-o-Y. In-house artists such as JO1 and Enhypen posted sales in OST and library single sales led the top line growth. Despite upfront production cost spending for Produce 101 Japan 2, operating profit recorded KRW 2.1 billion, confirming stability of library-focused album and single businesses. The business will ready itself for global expansion with more new artist reviews and stronger labels in the second half. INI is timing a debut in Japan, and the new girls' group, Girls Planet 999, is being readied for a launch. Business synergies with OST and Mnet content will be enhanced. The business will add more competitiveness to enhance our digital IP. Now we will hear the presentation on Studio Dragon.

[Interpreted] Good afternoon. This is Chul Ku Kang from Studio Dragon. I will brief you on our management results for Q2 2021. With aired titles decreasing by 4, our revenue recorded KRW 106 billion, which is a 34.3% decrease Y-o-Y. However, we were able to minimize the influence with premium IPs and overseas sales. With decreased revenues, OP recorded KRW 13.8 billion, which is an 18.2% decrease Y-o-Y. Despite the decrease in lineup, new titles ASP rose. We have expanded our business model to get added profit from IP original drama, and our OP margin improved 2.6 percentage points Y-o-Y at 13%. The number of lineups will be normalized in the second half. Studio Dragon will introduce diverse dramas, using webtoon, movies and novels' premium IP. Digital business, including NFP and metaverse will be expanded to enhance our IP value. New OTT platforms will be introduced. And with more original dramas, we'll continue to update our global influence. Now we will be entertaining your questions. Due to time limitation, we will entertain 3 questions from each questioner, and we hope to -- that you may be satisfied.

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

[Interpreted] [ Yes, I will give you the translation of the first question first. ] The question goes to Studio Dragon. In the first half of this year, the smaller to mid-scale production companies in Korea did well with the global OTT players. However, Studio Dragon, while it's the #1 player in Korea, but relatively speaking, I did not see much new from Studio Dragon compared to the less -- smaller scale production companies. And in your presentation there, I can see your future plans to expand more business relationships with global OTTs. But could you give us more color on that?

[Interpreted] Yes, this is CEO Chul Ku Kang from Studio Dragon addressing your question. Well, we have good outstanding relationships with the global OTTs such as Netflix in IP. And with Netflix, we do still have some contract time left. In fact, we did receive renewal requests from them, and we're preparing ourselves for this renewed contract. And we are discussing closely together with a major OTT player that is tied with Netflix there, and I believe soon we will be able to give you more information on this process. And well, we have budgeted, and we are working at the production of 8 types of movies globally with OTTs. And 2 is -- or we are currently in the production stage. And the produced titles will be aired in the second half of this year or maybe the earlier part of the year 2021, maybe in the first quarter. And we're preparing several titles for a prelaunch as well. And for Sweet Home, we are readying ourselves with the -- by combining of season 2 and 3 together. So we're in the process of making the Sweet Home available to the OTT player. And perhaps you might have felt our activities with global OTTs are rather limited with our activities with IP only being visible. But we have all these works building on which we will be introducing to you in the near future.

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

[Interpreted] My first question goes to CJ ENM. Well, you have treasury shares and you have also invested assets. Do you have in the near future plans to securitize this and use it for reinvestment circa short term maybe being in the second half? And then now my second question to [ Young Han ] is on your other adjusted guidance. As you have under the number up from KRW 250 billion to KRW 300 billion. Well, would you -- you already accumulated number of KRW 180 billion in the first half. Well, it may seem that in the second half, you are being rather more passive. So could you please elaborate on this? And my other question goes to Studio Dragon. Well, in the second half of last year, we -- a lot of live kind of type of sales to abroad. And do you have such plans for library sales in the second half of this year? And if so, where would those cases go to and so how much this? What terms and conditions?

[Interpreted] My first answer to the first part of your question, well, on the treasury stock, we did a buyback program when we merged. And the 5% of that buy -- bought stock, the treasury stock, well, they were used in our neighbor deal. And for the remaining 5%, we were thinking of using it for stock options to our employees. And we are in the process of, first, of designing our compensation packages or our compensation structures for our employees. And for our invested assets, including our investment in Netmarble, well, as you are well aware, we have liquidated minority portions to other minority stake holdings in the company. However, for the larger-scale assets that we have on hand, we will be thinking further on how to utilize it in our future made deals and so forth and so we will still have to wait and see. And now on to your guidance part of the question, we're still being conservative when it comes to our guidance announcement. The new management's direction is to actually give you a more conservative number upfront and to beat the goal and overachieve it. And well, at the earlier part of this year, we have given you in a guidance number of KRW 250 billion for operating profit. While that number was given very conservatively, reflecting that we have yet to establish a structure for how to keep our auditing practices and our practices and our practices processes and our amortization and depreciation processes. So much more is counted as expense in our simulation to come up with the KRW 250 billion number. And now we have revised up our guidance numbers, having tied with the overall -- the structural issues. And as was mentioned during the presentation, our revenue target or revenue guidance, we will be meeting at KRW 3.8 trillion. It's close to KRW 4 trillion number. It's such a large figure. Well, a 5% difference is huge -- is not huge number, would not really make a meaningful difference to our top line guidance. So that is why we maintain our guidance level for our revenue number. And I believe that you could have high expectations for our second half results. Now we will give you the answer for Studio Dragon.

[Interpreted] Yes. Now on to your question on the order types of sales abroad. Well, of overall overseas sales, our order types account for 25% to 30%. And I believe even with the expanded overseas sales, this proportion will be maintained going forward. And we do expect to see the proportion being maintained in the third quarter and the fourth quarter as well. It could even be an expansion. It's because of the following 3 reasons. First, on the global media market itself, competition is quite fierce in the global media market, especially in Southeast Asia. However, having said that, the type of plan is yet to be formed, and this adds as a very positive factor for us. The second reason behind our [ actions ] is the popularity of our titles in the Japanese market. Crash Landing on Love (sic) [ Crash Landing on You ] is a very -- still very popular about -- in among the Japanese audience. And NHK has recently aired a documentary on Crash Landing on Love (sic) [ Crash Landing on You ] and also on other Korean dramas. Voice 4 and Vincenzo is also very popular there. And therefore, we do have very good resulting expectations for our older titles in that market as well. And thirdly, nothing has been finalized yet, but China is showing interest in purchasing our Vincenzo title, and we hope to release you with more complete information in the near future.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The following question is by Kim Hoi Jae from Daishin Securities.

[Interpreted] I have a follow-up question on your LiveCity progress. So what's the status quo on your LiveCity project? And do you have an addition of funding plan for that project?