Studio Dragon Corporation (A253450) Earnings Call Transcript & Summary

[Foreign Language]

[Interpreted] Good afternoon. This is Kay Choi of CJ ENM's IR team. I thank the shareholders and analysts for taking the time out to attend our earnings release session. Now we will begin the 2021 Q3 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 such review. Today, we have here with us CEO, Ho-Sung Kang; Deputy President, [ Sang Yap Lim ]; CFO, Chun Kyu Park; EVP, [ Yoo Jin Lee ]; Content IP, [ Jae Hyung Kim ]; and from Content Solutions, Seong-Hak Lee; from Commerce, Ms. Hee-Jae Kim; from Pictures business unit, [indiscernible]; and from Music, we have Mr. [indiscernible]. From Studio Dragon, we have CEO Chul Ku Kang and Young Kyu Kim; from TVING, we have Ji-Eul Yang and [ Young Han Lee ]. First, CEO Ho-Seong Kang will present on the company's medium-term vision and strategy.

[Interpreted] Good afternoon. This is CEO Ho-Seong Kang of CJ ENM. The company continued its content competitiveness-based profit growth in the third quarter. Media, in particular, renewed its record operating profit, leading overall profit growth. Ratings and popularity of channels as well as rapid increase of our OTT TVING subscribers added strength to our business repetitiveness. CJ ENM is expediting our mid-term strategy execution, and we'll be sharing the results with our shareholders. As was announced by the group's presentation of our vision and business strategy on the third, CJ ENM will add more speed to our growth as a leading content and entertainment company. We'll expand our domestic #1 results to overseas and enhance our content influence in the global market. Through strategic reliance with outstanding companies at home and abroad and through talent acquisition, we continue to enhance our unparalleled capabilities and expand premium IPs. The company will step up [indiscernible] of our digital platform and thoroughly strengthen [ competitive ] content production. TVING is already witnessing its initial success. Planned community platform [indiscernible] business and digital commerce platforms will see added sophistication. CJ ENM will review our execution strategy to further continue our 2021 content [indiscernible] into the future, and to that end, we're enhancing our business portfolio. [indiscernible] on each [indiscernible] and global entertainment company with expanded premium IP and digital transformation. In closing, I deeply thank the shareholders and analysts for their time today. Thank you.

[Interpreted] Next, we will hear the results presentation. The quarterly [indiscernible] results of CJ ENM are KIFRS-based consolidated numbers.

[Interpreted] Good afternoon. This is Sang Mook Hwang of CJ ENM. The company's Q3 consolidated revenue was at KRW 857.5 billion, which is a Y-o-Y growth of 7.4%. Operating profit at KRW 87.8 billion grew 23.6% Y-o-Y. Entertainment recorded a revenue of KRW 541.7 billion with OP of KRW 60.8 billion, and Commerce reported KRW 315.8 billion with OP of KRW 27.0 billion. In Q4, with stronger media and music content competitiveness, the company will aim to maximize our gains in the high season. Content competitiveness-based TV ads and digital revenue will be expanded, and our Commerce business with PBs and strength in digital will focus on profitability recovery. The Pictures business will address market changes through diversified theater releases and OTT sales. Music will seek further growth with expanded global artist lineup. Page 5, Media. Third quarter Media business unit renewed its record with revenue increasing 19.5% Y-o-Y at KRW 442.8 billion and 119.4% Y-o-Y growth of operating profit at KRW 64.2 billion. With synergy from stronger contents and many media solutions, TV ads and content sales led the growth, leading to operating profit rate of 14.5%. With continued increase of paying TVING subscribers and expanded branded content, digital revenue continued its rapid momentum with 56.8% growth. The company will continue its fortification of content competitiveness and TVING original contents. We will expand our channel influence through anchor contents, such as Melancholia and Secret Royal Inspector & Joy. And through IP expansions, such as Three Meals a Day: Doctors. To retain existing subscribers and to continue acquisition of new subscribers, TVING will enhance its library titles, including Work Later, Drink Now and Love Catcher in Seoul. Page 6, Commerce. The Commerce business unit's revenue stood at KRW 315.8 billion, a decrease of 8.3% Y-o-Y with operating profit of KRW 27 billion, a decrease by 36.2%. With low season, demand for tangible products, such as home appliances and interior, decreased, leading to a deterioration in TV GMV over the previous year. Lower product brands and higher-margin GMV led to profitability decrease. The business will actively launch new product brands in Q4 and actively address the coming high season for fashion and beauty to recover its GMV. With added digital and the competitiveness, product portfolio will be enhanced, leading to strengthened digital GMV and profitability. Page 7, Pictures. Pictures business revenue recorded KRW 33.1 billion in Q3, which is a decrease of 10.2% Y-o-Y with operating loss of KRW 14.3 billion. The Cursed: Dead Man's Prey and On the Line were released, but with delayed normalization of theater operations and lackluster performance of the titles, our theater revenue decreased. The business increased the number of musical titles but, with poor attendance, recorded an operating loss. In the fourth quarter, nothing serious is scheduled for release on November 24. Our musical, Maybe Happy Ending, is planning an online streaming. Different titles will go for diversified distribution, including overseas and domestic theaters, global OTTs and TVING in Korea. Page 8, Music. Music revenue at KRW 65.8 billion grew 40.4% Y-o-Y. JO1 recorded Oricon chart #1. With JO1's album sales and program revenue of Produce 101 Japan 2, the Music business' global results added to profitability. OST library sales were steady in the domestic market. Sub-labels, such as Lapone and Belift Lab, performed well, contributing to profitability improvement. Operating profit grew 210.7% Y-o-Y at KRW 10.9 billion. New album releases by JO1, ENHYPEN and TO1 are scheduled for Q4, and the business will fortify its global readiness with debut of Kep1er and INI. With the restart of live concerts by Street Woman Fighter, 2021 MAMA and many concerts of JO1, the business will continue its revenue expansion in earnest.

[Interpreted] We will be hearing the presentation from Studio Dragon.

[Interpreted] Good afternoon. I will brief you on 2021 Q3 results of Studio Dragon. Revenue rose 9.2% Y-o-Y at KRW 116.1 billion, turning to growth. This was a result of global reference expansion with wider digital channels and new genre discovery. Operating profit decreased 9% Y-o-Y at KRW 14.6 billion. The high baseline effect with sales in China last year influenced our numbers, but with continued ASP increase for our new titles, we continue to enhance our profit structure. We will cement our market leadership position in the fourth quarter with diversified drama genres and enhanced IP competitiveness. As of end of Q3, our asset under construction was at KRW 138.6 billion, a 48% Y-o-Y increase. We are planning, developing and producing more than 120 titles. 22 bound for TV, 8 for global OTTs, 6 for TVING. These are fixed numbers, and there are more than 178 finished titles. We have the largest library that further adds to our IP competitiveness. With that, we will fortify our global negotiating power and continue to expand our market. We have successfully received orders in the second quarter for Apple TV+ series, which is the first-ever Korean player and set foot directly in the U.S. market. We are adding details to our work with global major OTTs, such as Netflix in U.S. and Disney+. Studio Dragon will execute our plans to expand our global foothold by moving to diverse markets, including Japan. Thank you.

[Interpreted] Now we will be moving on to our Q&A session. Due to time constraint, I ask you kindly to keep your questions [indiscernible] to the point and please keep [indiscernible].

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

[The interpreter states that she will give the translation of the analyst's three questions.] My first question is related to TVING. It's quite encouraging that the number of paying subscribers to TVING is on the rise. But as was mentioned, there are a lot of OTT players currently working to gain the premium market in [indiscernible] Disney+ and Apple TV. And also many other domestic players are fighting for the same pie. So will you be going by the same guidance number that you have provided for your TVING business? This is my first question. My second question goes to Studio Dragon. I would like to know about your plans to set directly first in the U.S. market or the new title that's catering the new U.S. market with. So could you please give us some more flavor on your U.S. strategies? My third and last question [indiscernible] Studio Dragon. Well, other content players have seen their stock prices rise significantly, but the Studio Dragon did not see such a high rise in stock prices. I believe that it's because you lack delivery to Netflix for their original content. So do you have any lineup planned to be delivered to Netflix as their original content? And could you please tell us about your potential cooperation with other international OTTs?

[Interpreted] Yes, I'll first take the TVING question, and then Studio Dragon will answer.

[Interpreted] Yes, I will be taking the TVING question. Well, as you have mentioned in your question, there are a lot of international OTTs entering the Korean market, and there is also very active move by the domestic OTT players, but we have anticipated such a move long time ago. So our strategy remains the same, and our target remains the same. It's to grow our TVING business threefold compared to the beginning of the year. Our staff remains sustained. And it's because of the factors that I'll be illustrating below. It's because we will be fortifying our OTT TVING with our original content, and through strategic alliance, we have our plans to enhance our subscriber bases. And many users, they use not only one OTT platform but multiple OTT platforms. And so the pie itself is growing. These are the reason why we still remain -- retain our stance. And on top of that, based on our domestic success, we have also active plans to go abroad with our services. Now Studio Dragon will offer you their answer.

[Interpreted] So I'll be addressing your U.S.-related big door price question first. This is CEO Chul Ku Kang of Studio Dragon. Well, we're in the tapping phase to select directors, directors for the initial phase and also the latest stages. And we hope to see a cranking by the earlier part of year '22, and we hope that with the contents to be aired by the end of that year. And it's a cost-plus original model, where we get to retain on some rights of the IP. And as for our plans in the U.S., we are working directly with Netflix U.S. on the remake of accidental -- or Crash Landing On Love. So the stake involved here are -- well, the participants involved here are Skydance and Netflix U.S. and Studio Dragon. We are working on the remake of [ Accidentally Crash Landing on Love ]. And as for our plans to supply Netflix originals, well, we're working on five titles, including [indiscernible]. These are fixed titles, and we have begun work on them, including production, and we have three ready for [indiscernible]. And as for our future plans with other global OTTs, well, we are not at the stage yet where we could disclose user details, but we are working together with the Apple TV+ and also Disney. We're tapping their needs and requirements, and we're pitching to them. That's it for the answers.

[Interpreted] The following question is by Paul Choi from CLSA.

[The interpreter says that she is giving the translation of the question] Korean content, Korean drama is increasing. Squid Games, they have gained huge popularity among the global audience, so there is a big rising interest for Korean drama content. And while now it's proven that Korean content in Korean language actually works with the global audience, so many people, many investments are keenly interested in your U.S. localization strategy, and many foreign investors are curious as to how you'll be approaching this market. Could you please give us more color on your plan?

Yes, this is an answer provide by Studio Dragon. Well, there are Korean dramas in Korean language. And this year and last year, we have lined up for 26 titles. And next year, we hope to expand this number to beyond 30. And these Korean-language Korean dramas, they will be distributed through various channels throughout the world, and this will be our primary focus. But we also have other track that we hope to pursue, the U.S. local dramas, so we hope to be working in the most advanced drama market in the world, which happens to also be the largest globally. So by going there directly and working on their local dramas, we hope to learn about the most globalized system and the most advanced processes, and we hope to embed what we have learned in that advanced market into our company to earnestly upgrade our capabilities and to have a structure ready in which we have embedded and made our -- the advanced system. So this is a two-track approach that we are taking in terms of taking our contents abroad. And our activities will be focused on advanced drama hubs, including the U.S. and Japan.

[Interpreted] Yes, this is Kay Choi from IR speaking. Well, I forgot to introduce to you, [ Mr. Kisan Hong ], who heads IP distribution. And of course, it's true that with huge success of Squid Games, there's a lot of interest for Korean content. But we have been working on disseminating or spreading Korean content long before this big phenomenon. So we have been really working on distribution of Korean content. So it would be good to be hearing about our distribution strategies as well.

[Interpreted] Yes, this is [ Mr. Hong ] from IP distribution talking on our global distribution strategy. Well, our approach is to sell Korean content through global OTTs and also regional OTTs, where there's a lot of interest for Korean content, especially in Southeast Asia and Japan. And according to the different items or different nature of our content, we sell it to either global OTT or regional OTT in a way which maximizes the value of the content. And it's quite encouraging that while the global OTTs, they are quite interested in the Korean market, and they may be in competition with our platform TVING. But having said that, we have a huge library with hundreds of titles, which are -- we could sell to the global OTTs. And the huge library is revolved every 2 years, also enhancing our sales opportunity.

[Interpreted] [Operator Instructions] The following question is by Shin Eun Jung from DB Financial Investment.

[Interpreted] Yes, I have a question for your Music business unit. It seems that the revenue side is somewhat similar to what you have witnessed last quarter in terms of operating profit and number [indiscernible]. Could you please illustrate why?

[Interpreted] Yes, profit from our Music business, it comes from the current library plus better margin contribution from album sales. And as I've mentioned during the presentation, our boy band in Japan, they performed extremely well. J01, their activities in the second quarter led to great results. And INI, our new boy band that has yet to debut, has -- is already creating or generating revenue through their fandom. And international contribution to our Music business accounted for more -- about 50%. And the stream that comes into our -- into making of our overall revenue, I believe that, that has been a great improvement. This is more or less directed towards the profit-related part of your question. And our Music business unit, Mr. [indiscernible], could give you more color on the Music business as well.

[Interpreted] This is [indiscernible] from Music [indiscernible] the results of our Music business. Well, we have seen an improvement in our third quarter numbers with in-house IP improvement, and the single sales of JO1 in Japan was good as was programmings revenue from Produce 101 Japan, too. And Belift Lab and other sub-labels also has stellar performance, and also we've seen good sales revenue from our library type of sales. And in the fourth quarter, we also do expect to see a top line growth with many of our in-house artists gearing up for their activities in the fourth quarter and also with the restart of live concerts and with that inflow of live revenues.

[Interpreted] Next question, please?

[Operator Instructions]

[Interpreted] Since we have no further questions, we will be ending our earnings call session here. Thank you once again for attending 2021 Q3 Earnings Release Session of CJ ENM. [Foreign Language]

[Interpreted] This concludes the Fiscal Year 2021 Third Quarter Earnings Results by CJ ENM. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]