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'll begin the conference of the Fiscal Year 2021 Fourth Quarter Earnings Results by CJ ENM. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2021 fourth quarter earnings results 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 meeting despite their busy schedule. Now, we will begin the Q4 2021 earnings presentation section 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. Here with us are CEO, Ho Sung Kang; Deputy President, Sang-Yeob Lim, and Heads of different business units. We have Mr. Chun Kyu Park, the CFO; and [ Hu Gyeong Lee ], EVP; [ Ki Sung-Yueng ] from IP Distribution; [ Seong-Hak Lee ] from Content Solutions; [indiscernible] Park from Commerce; and Ms. [indiscernible] from Pictures; and [indiscernible] Kim from Music, and we have from Studio Dragon CEOs, [indiscernible]; and Kim Young-Kyu. And from TVING, we have CEOs, Ji-eul Yang and Myung-han Lee. First, CEO Ho Sung Kang will present on the company's mid-term vision and strategy.

[Interpreted] Good afternoon. This is CEO, Ho Sung Kang of CJ ENM. Despite tougher competition in 2021, CJ ENM recorded record operating profit. This was the result of continued strengthening of outstanding content and product competitiveness. The company will continue its business growth in 2022 as well with superior content production and brand differentiation. First, we will focus on digital transformation based on premium content. Media digital revenue will go beyond 30% in 2022, and the number of TVING subscribers is to double, cementing our position as a content platform player. With sustained TV and brand strategy, commerce GMV is to grow over 8%, focusing on digital and mobile comps. The company will extend its multi-studio strategy and [indiscernible] expand our global business this year. Premium IP and convergence content production will see a powerful expansion this year. The acquisition of U.S. Endeavor Content has been completed, and our global content fortification strategy continues. Through the [ expansion ] of new studios, CJ ENM will put a greater distance between us and the others when it comes to content [indiscernible]. We will always think of our shareholders in our growth path. The company will attentively listen to and increase communications with our shareholders. The BOD has resolved today on KRW 2,100 per share cash dividend totaling KRW 43.5 billion, which is an increase of 31%. CJ ENM will aim for over 20% payout ratio in 2022 as well. As the member of society, we will further enhance our ESG management activities on human rights and environment. I deeply thank the shareholders and analysts for their continued interest. CJ ENM, as a representative Korea company, will grow further in the global market in 2022. I wish for the best for all our shareholders and their families in this new year. Thank you.

[Interpreted] Now, we will hear from Mr. Chun Kyu Park, our CFO.

[Interpreted] Good afternoon. This is CFO, Chun Kyu Park. I will brief [ our ] yearly business plan. The consolidated revenue guidance for 2022 is at KRW 4.3 trillion, which is a growth by 21%, with operating profit of KRW 270 billion. EBITDA is expected at KRW 885.0 billion, with [ steady ] growth. Top line will grow with expanded content production and with our content domestically and internationally, our business fundamentals will get stronger. As was mentioned, the company aims to deliver over 20% payout ratio this year. I will give you more details. With superior content [ fortification ] in 2022, the company aims to increase our revenue, market share and business competitiveness. We aim for 100% revenue growth on TV by securing over 4 million subscribers. Based on our media mix and solution capability, the company aims to grow our ad revenue by over 10%, with increase in content production, sales revenue [ growth ] was also positive. The company's overseas content sales revenue growth is at over 20%. The plan new media content for channel [indiscernible] is at a total of 2,500 hours. This is an increase of over 30% over [ Studio Dragon ] and with this, the company will continue to win more market share. Production merchants, including national TVING and channels, is planned at KRW 860 billion won. TVING [ were accessing ] over KRW 200 billion in terms of original CapEx and through that, aggressively secure more subscribers. The company will focus on winning more market share and business growth through content in year 2022. This concludes the presentation on this [indiscernible]. And we will now continue to talk about our fourth quarter numbers.

[Interpreted] Yes. Now on our results presentation. Please note that our quarterly and yearly results are on K-IFRS consolidated basis. Now, we will hear the business results for Q4 year 2021.

[Interpreted] Good afternoon. This is [indiscernible] from CJ ENM's finance division. Q4 consolidated revenues of KRW 995.0 billion grew by 5.4% Y-o-Y, but operating profit at KRW 29.6 billion decreased 66%. This is mainly due to incentive payment-related one-off costs. Media and picture business [indiscernible] recorded losses. But with stronger growth in Japan, music business unit recorded the best-ever quarterly operating profit with KRW 19.2 billion. For year 2021 as a whole, the company set a new operating profit record. Revenue was at KRW 3.5524 trillion with operating profit of KRW 296.9 million. Entertainment recorded an operating profit of KRW 176.8 billion, with commerce at KRW 120.1 billion. With continuous COVID in 2021, live revenue inevitably decreased, but this was offset by the rapid growth of digital revenue. Even with more content production, the company maintained its profitability. CJ ENM will continue to enhance our market share through top line growth in 2022 as well. As for business unit-wise details, please refer to the presentation deck. Thank you.

[Interpreted] Now, we will brief you on the [ quarterly ] results of Studio Dragon.

[Interpreted] Good afternoon. This is CFO, [indiscernible] from Studio Dragon. I will brief you on Q4 and yearly results from year 2021. 2021 Q4 revenue increased 7.4% Y-o-Y at KRW 147.9 billion. With selling concerns over revenue growth, we delayed the revenue share of Jirisan, operating profit recorded KRW 6.3 billion. With decrease in the number of [ title this year ], yearly revenue for 2021 decreased 7.3% Y-o-Y at KRW 487.1 billion. But with enhanced profitability, operating profit saw a 7% improvement Y-o-Y at KRW 52.6 billion. Now, our new CEO, Young-kyu Kim will give our year 2022 outlook.

[Interpreted] Good afternoon. This is CEO, Young-kyu Kim of Studio Dragon. Following our 2021 business results presentation, I will brief you on our 2022 strategy. Production environment has become tougher with COVID, [ partly ] with collaborations with global OTTs and with the stronger K-drama, well, there are more opportunities out there for K studios. In year 2022, we will once again cement and improve our position as the market leader, focusing on growth, expansion and global. We will make it a year to prove that we are a strong dragon. Probably more than 32 titles from line-up and distribution growth over 60% compared to the previous year, leading to a top line growth. This is the most number of titles that we are about going to introduce for the new year. We have many big titles that are currently being readied and/or in production and we have already made in place relationships with various OTTs. And with that, we have secured platforms for our creation to new year and with all these activities in place, we will be securing our profits with our businesses. And if I may, some of the renowned creators that are going to work with us, we are going to work with the [ home ] systems and of the [ right ] engine and we are also going to work with directors. And we're also going to work on realizing the global universe of YLAB. And we also have plans to work with a renowned writer, [ Kim Eun-sook ]. And we have also our subsidiaries that are gearing up to introduce to you new content. And with all these activities, we are going to introduce to our audience the various entertaining new contents. And we have added more details to our global project last year and that has given us tangible results that would prove to be another engine going for added growth. We have The Big Door Prize being aired for Apple TV and we are waiting ourselves to supply to additional Hollywood entities. We are also ready to expand our studio model to markets such as Japan, where there is an established industry basis for dramas. With our cumulated differentiated capacity and experience, Studio Dragon will strengthen K-drama and in doing so, become a global studio.

[Interpreted] Now, we will be taking your questions. Due to time constraints, please restrain your questions to 3 each, centering around core issues.

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

[Interpreted] Yes. The first question is for Studio Dragon. Well, it's a general talk in the market that the number of titles that you provided to OTT, the original dramas [ bound for ] OTTs were somewhat one thing in year 2021 and you in your presentation mentioned 32 titles to be created this year and after 32, how many are bound for OTTs? So that is my question. And could you please mention some of the titles that you're currently working on? And now with the appointment of the new CEO, what would be your management focus? Is it top line growth or is it continued profit improvement? So I would like to know about the directionality of your management focus. That was the first question for Studio Dragon. And now my second question goes to TVING. Well, in the presentation, it was mentioned that KRW 200 billion will be spent for your investment in 2022. And you've mentioned before that until year 2023, the accumulated investments for TVING was somewhere around KRW 400 billion. So is the KRW 200 billion included in the KRW 400 billion figure that you previously mentioned or is it an increase in number? So I would like to hear more clarification on that. And now, on to the third question, I believe that you have secured a stable profit source for a quarterly basis and in your presentation, it was mentioned that you had model spending [ were one-off cost ] in the fourth quarter, and you've given us in [ OT ] guidance number of KRW 270 million. I think this is a slight decrease from the previous years. So going forward, do you expect to see continued one-off factor if that is in the fourth quart? So that would be my questions.

[Interpreted] So the first question bound for Studio Dragon will be addressed by CEO, Kim of Studio Dragon. The second question for TVING will be addressed by CEO, Yang of TVING; and now the third question would be addressed by CFO, Park.

[Interpreted] Yes. Well, this year, we have plans to introduce at least 13 titles that are bound for the OTT platform. If you compare it with few other titles that went to the OTT platform last year, it's an increase by 5 to 6 titles. And now to the second part of your question, well, with increased titles, of course, there will be increase in production, but in 80% to 90% of our production cases, we already secured basis to recoup what we have spent in production. So with top line growth, we also do have expectations or better margin. So it will be going for 2 elements at the same time, both for quantitative growth and also qualitative growth.

[Foreign Language]

[Interpreted] Yes. This is CEO, Yang addressing your question that was for TVING. Well, we mentioned to you in the earlier part of year 2021 that we have seen a threefold growth when it comes to paying subscribers. And based on that confidence, our target [indiscernible] number of subscribers is also very aggressive and accordingly, we will be making investments in content to get that -- or get the number of subscribers. And as was mentioned, we are aiming to increase our paying subscriber bases by twofolds, and that will give us about [indiscernible] million paying audience and paying subscribers. And this is an aggressive investment goal, rather a bit more aggressive than the KRW 400 billion, that was previously mentioned but once again, with aggressive expansion goals for our subscribers, we do not foresee any big glitches on the way.

[Interpreted] Yes. As was mentioned in our guidance presentation, we have set our goal KRW 3 trillion in terms of revenue and KRW 270 billion in terms of operating profit. For revenue, it's an increase by 22% but as will be, it's a downward move by about 9%. It's because we want to spend for future growth especially with TVING and also with the production. But as was mentioned in the presentation, we will continue to sustain our EBITDA growth going forward. And as for our 4Q results, well, the one-off element it was mainly due to incentives and also one-off investment loss related to US movies. But these are non-repeat items. And as was mentioned, well, we would be going by, as mentioned cost structure for each quarter and that will take away any volatility.

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Interpreted] Yes. I would like to hear more details on the previous answer related to the one-off spend and I would also like to hear more about the profit. Well, you've mentioned incentive and also, one-off expense related to your activities in the [ press ]. Could you please tell us in amount terms how big they are? And well, if you exclude the Dragon numbers, well, would you be seeing revenue numbers with -- in your books? And the second question is related to TVING. Well, I would like to know more details about your ARPU and the subscriber bases. And I'd like also to hear more about your membership collaboration with Naver. So this was second question that is related to TVING. And now the third question is for Studio Dragon once again. In your presentation, you've mentioned your global plans and also the initiative that you're going to take in Japan. So aside from that, could you tell us more detail about your other [ OTT ] projects?

[Interpreted] Yes, if I may give you more details on Q4 numbers. Well, there was a reflection with the incentives, so that is more on our incentive payment. And with TVING original, well, our production cost has also seen a rise. And if I may give you yearly numbers, incentive payment was at KRW 56.2 billion and it's quite difficult to give you a business unit-wise breakdown of this number. But as you are well aware, the media business unit has the largest contribution to our numbers. So the incentive payment is quite in proportion to the contribution level. And as for TVING original, with more TVING originals, we have seen a rise in our production cost and including channel bound for investments with production, well, the 4Q number is that KRW 20 billion thereabout. Yes. And your last question, will we be seeing numbers and should really exclude Studio Dragon numbers from my numbers? Well, I think that's a bit to excessive. Well, if you look at our 2021 numbers, well, we did have some one-off element in Q4. But if you look at our media business unit operating numbers, we recorded the best-ever operating profit for our media. The same could be said for the company-wide operating profit numbers as well. And this year, our guidance of operating profit number, with KRW 270 billion, well, that's a 9% squeeze over the previous year. But as usual, we are giving here a very conservative guidance for your information and with more content production and competitiveness, we would be seeing our top line growth. And as we see the top line growth progressing throughout the year, we will be engaging in a more delicate balancing activity.

[Foreign Language]

[Interpreted] Yes. Please understand that we do not disclose our ARPU numbers nor the number of subscribers, paying subscribers. But I can safely say that TVING is going for balanced growth both for top line or for our profitability. And with that said, we are working very hard diligently to improve our ARPU as well. And as for your question of Naver membership, well, starting this year, we are going to provide the original TVING contents to our higher tier subscriber. And so this will induce the subscribers to upgrade their viewership or membership and the result so far has been quite positive. So TVING goes by 3 fee structure, 2 of them being premium and standard and we are continuously engaging in promotion to upgrade the tier or the membership that is being held by our paying subscribers. And we also do have a relationship with a company, the comics company. So with their TV products, we try to offer our users easy-to-use, convenient to user experience in U.S. And with that, we are also luring or inducing our subscribers to move to more premium subscription basis. And as for your question on relationship with Naver, they are also TVING shareholders and our relationship back in 2021 produced very good tangible results. And so with that, the 2 entities are in it for the long run. And last year, we see both our external size growth and as well as ARPU improvement. So both the partners are quite satisfied with this relationship.

[Foreign Language]

[Interpreted] Yes. This is for Studio Dragon. You wanted to know about our global initiative, well, our titles, our Studio Dragon drama titles, they proved to be a big hit from -- in Japan. And with that, we are getting a lot of calls from potential Japanese partners. We were the first to create a drama studio model in Asia, and we hope to bring our expertise to Japan and has translated to a local production there. So we are in the process of choosing the optimal strategic partner there. And I believe things will see more [indiscernible] at which point, we could disclose to you more details. And now, on our activities in other regions, mainly Hollywood, U.S., well, the Korean IPs, they are getting a lot of attention nowadays from Hollywood than the U.S. and they have taken interest in our library titles as well. So we are thinking of various ways to approach this, whether it would be through co-production or remake of our IP. So we are getting a lot of inbound inquiries to use our IP and well, we have made investments in many entities there, too, and we are also thinking of how to optimally use our IP in that market, whether to go for remake or to engage in a co-development activity. So we are currently developing and pitching various titles in that market as well. And I believe we will be seeing tangible results for 1 or 2 of our initiatives within the year.

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Interpreted] Yes. I have 3 questions actually. First is, well, related to TVING and Studio Dragon. The second question is related to ENM, TVING and Studio Dragon. The third question is mainly for ENM. Now, into my first question. Well, the TVING original was -- where's that the IP ownership lie? Does it lie with Studio Dragon? Is it with TVING? Or do you have co-ownership with IP? And what is the profit model with these activities? So I would like to know that. Is it the production cost plus guarantee or partial recoup plus sales of copyright? So I would like to know about the profit model with TVING. And my second question, well, your 2021 was a good year -- content...

[Foreign Language]

[Interpreted] And so once again back to the second question. Your 2021 was a good year for Korean content and Korean drama, the environment was really good for Korean content. However, Studio Dragon's performance back in year 2021 was a big lackluster. Is it because of Studio Dragon's relationship with TVING? So how much of an influence does your tie with -- Studio Dragon's tie with TVING have on your performance? Well, I could cite, for example, HBO's relationship with the Game of Thrones and also Disney's limited supply of their content to Netflix before they launched their own OTT. So are you bound by such relationships? And will -- would Studio Dragon be increasing their title supply to TVING whereas decrease their relationship with Netflix? So that's my other question. And now on the average selling price, I see that your ASP has become a little bit more slower. Is it because [ you're dealing ] with your relationship with TVING? Well, does the relationship with TVING affect the ASP of Studio Dragon? And does it hinder your negotiation with other OTTs? So this was my second question related to Studio Dragon's relationship with TVING. And now onto the third question for CJ ENM. I do believe that you have any in-house content division of -- and I did hear something about you separating this division. And there must be issues in sharing programs, channels. So is there much pressure on this programming? And well, does sharing channels act as a burden on you whether it be formatted or non-scripted format? And I would like to know about the...

[Foreign Language]

[indiscernible] slot complex. So these are my 3 questions.

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Interpreted] Yes. Now, on your IP-related question, basically, the IP ownership lies with TVING and there are some cases in which ENM and Studio Dragon has joint ownership of IPs.

[Foreign Language]

[Interpreted] Yes. It may seem that our supply to Netflix for their original titles have seen a decrease last year. It's not because we have increased our supply to TVING. Well, TVING is one of our clients and we have a big contract in place with Netflix. And in the current contract, the minimum number of titles to be supplied to Netflix is set there. So we move according to that contract and we look at the nature of the content in deciding whether to go for global OTT platform or a domestic platform. So it's really dictated by the nature of the content. So we do have this good relationship with TVING. And we also have multiple various good relationship with international OTTs, including Netflix. And well, does our supply to TVING influence their profitability? No, we go by market standards in entering into these terms. Yes. As was mentioned in my presentation of our year 2022 strategy, we are at the brink of entering into a tangible agreement with international OTTs other than Netflix. So that is why we have plans to introduce the most number of titles in this year and with that -- well, that was the answer.

[Interpreted] And now, before we take the third question, I would like to add my remarks. Well, if you look at the viewership pattern, it's really fragmented nowadays that people view contents in various multi-platforms. And well, ENM, Studio Dragon and TVING, in programming or channel programming and streaming, they are mixed in various formats and experimenting to maximize the benefit to the company. So we do look at possible spin-offs and we look at convergence content. So the content that is there on TVING with some time lag [ could see ] programmed and aired on channels. And this is a strategy that cannot be duplicated by global OTTs such as Netflix and Disney. So -- well, this is one benefit that we can enjoy. And the other group OTTs are, I believe, following our suit. They released their content in small charts on a weekly basis. So this is a strategy that they are going with to do what we are doing. So when it comes to pushing up our average selling price, we are engaged in various strategies to maximize our ASP. [Interpreted] And if I may take the last part of your question on our multi-studio structure and the possible conflict that it could bring, well, OTT and transmedia platforms, we may be going with them for -- to expand our non-captive content. And well, with its influence, the captive revenue of Studio Dragon, I think this is being a bit too of concerned over a very minimum possibility. So we will be going for multi-studio strategy when it comes to OTT and transmedia. And with that, we will see more co-production.

[Foreign Language]

[Interpreted] The following question is by Park Hyung-min from CAPE Investment Securities.

[Interpreted] My first question is the relationship between TVING and Naver. Well, the relationship taking it to Japan and using it for your promotion of purposes. And with this collaborative promotion of plan in mind, if this what makes you more confident about having 4 million to 5 million subscribers by the -- so this is my first question. And my second question is related to the spin-off. Of course, in your previous disclosure, you said you will be taking different stances and that statement really pushed up your share price. But I would like to know more about your future directionality when it comes to Studio goals?

[Foreign Language]

[Interpreted] Yes. This is the answer provided by TVING. Well, our relationship with Naver, we are talking with various potential international investors on how we could take our business to the global stage. We are currently talking and discussing with Paramount, other global studios and many other companies. So when the projects or initiatives, [ if they come more fresh ], we will be delivering the message to you. And as for the mentioned, 4 million to 5 million subscriber basis, this does not include global audience. And once again, if things become more concrete, we will be making sure to update this information to you.

[Interpreted] The second question will be addressed by CEO, Kang of CJ ENM.

[Interpreted] I guess, as you're well aware, there were a lot of interest from involved parties on the possible spin-off of our second studio. Well, the spin-off was contemplated in order to add more efficiency to our IP business and also to enhance the efficiency when it comes to production. So with that, the company has thought about spinning off the second studio to add more efficiency to our content production and to have a swifter and quicker decision making. And well, there has been press report, as you're well aware, for a possible spin-off in May last year 2021. And with that report, we did receive a lot of pressure in the market on whether this was going to aspire or not. And that is why we have to address that question. And on November 19 last year, we had the disclosure on the spin-off of the second studio. But after that announcement, we did receive a lot of concerned voices from the shareholders. And as you're well aware, the regulations concerning spin-off saw very rapid changes last year. And we had to address all these changes, all these rapid changes and also the voices of our shareholders. So we are thinking various directions on how we could defend the shareholder value and also to meet the fast-changing regulation. So once we get things ready and once we finalize the direction [indiscernible], we will be sure to deliver the message to you.

[Foreign Language]

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] Yes, we did receive a question by text and it was related to endeavor content on the proposed integration and their content line-up.[Interpreted] So our Deputy President, Lim will be addressing that question.

[Interpreted] Yes. This is Deputy President, Sang-Yeob Lim. Well, after the deal closing, we have prepared the proposed [indiscernible], it's currently underway and we are currently focusing on its fitting process because there are differences when it comes to U.S. and Korean production system, and also there are cultural differences. So that is why we are focusing on fitting. And we are concretely working on the line of strategy as well. As of today, we believe that we will be releasing about 15 to 20 titles, TV series and pictures. And in the near future, by the end of February, Killing Eve Season 4 will be aired on BBC. And in the second quarter, See Season 3 is to be released on Apple TV. And as for pictures, The Lost Daughter that was released on Netflix [indiscernible] and nominated for an Academy Award and Cha Cha Real Smooth, a Sundance award-winning content is to be aired on Apple TV as well. So continuously we will be working on strengthening content production and planning capabilities to enhance global results even further. Thank you.

[Interpreted] So I see no further questions. And if there are no further questions, we hope to end the session here. Are there any further questions?

[Interpreted] Currently, there are no participants with questions.

[Interpreted] Once again I thank everybody for participating in our 2021 Q4 CJ ENM earnings release session. Thank you.

[Interpreted] This concludes the fiscal year 2021 fourth quarter earning 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.