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 2022 Second 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 2022 second 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 earnings release session despite your busy schedule. Now we will begin our earnings session for Q2 2022. 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 reviews. Here with us, we have our CEO, Ho Sung Kang; and heads of different business divisions. With us, there's Mr. Chun Kyu Park, CFO; and [ Hu Gyeong Lee ], EVP; [indiscernible] CFO; [ Ki Sung-Yueng ] IP business; [ Seong-Hak Lee ] Content Solutions; [indiscernible] Park of Commerce; and [indiscernible] from Pictures; and [indiscernible] Kim from Music. We also have co-CEOs, Je-Hyun Kim and Young-Kyu Kim from Studio Dragon. And we also have Ji-eul Yang from TVING. And from Endeavor Content, we have 2 CEOs, Chris Rice and Graham Taylor. First, our CEO, Ho Sung Kang, will deliver our major results and strategy.

[Interpreted] Good afternoon. This is me Ho Sung Kang of CJ ENM. CJ ENM greatly enhanced its global business competitiveness in the first half of 2022. Our Studio subsidiaries, including Studio Dragon and Endeavor Content increased their global content IP. Our content influence expanded in global markets, including the U.S., and our music business also was supported by centering around Japan's Lapone. The company continues to expand business leadership in the changing media environment with the strengthened digital content and OTT platform growth strategy. The rapid expansion of digital channel traffic and ad revenue continues too. TVING has successfully increased its content library and business alliance formation to increase subscriber bases. In the second half, the company will focus on profitability improvement based on stellar content competitiveness and stronger business portfolio. CJ ENM will further improve content hit ratio and exponentially increase TVING subscriber bases and market share. Our commerce business will also improve profitability with enhanced brands and GMV. CJ ENM was not complacent with our dominant domestic position and continued our global expansion strategy. Now we are seeing our efforts reach fruition. The staff and management at CJ ENM will do our best to see more concrete business growth in the second half. In concluding, I thank the shareholders for always supporting our growth. Thank you. Next, we will be moving on to Page 4. We will be hearing and addressed by CEOs, Chris Rice and Graham Taylor from Endeavor Content.

Hello, my name is Graham Taylor, Co-CEO of Endeavor Content and along with my fellow co-CEO, Chris Rice, I would like to thank all of you for listening today. We're thrilled to be here and enjoying the incredible CJ ENM family. Chris and I showed a deep conviction that the synergies and strategic advantages of combining CJ ENM's Asian footprint and Endeavor Content's U.S. and growing European footprint will create great value over the coming years. In the process of spinning out our business from our former parent company, we were blessed to have many options, and we truly believe CJ ENM was the best strategic owner for us. The synergy of global projects and sharing our collective IPs presents a great market opportunity and we've already begun with more than a dozen synergy projects across film and television and development between the Endeavor Content and CJ ENM teams.

Thanks, Graham. Together, Graham, myself and our team have built a scaled studio from scratch. Our core business is television and film production and ownership as well as third-party television distribution. But we also have growing businesses in documentary, music soundtrack music publishing and events. We recently financed and launched production businesses in the U.K., Canada, Australia and Scandinavia with more to come. As a scaled independent, our model is to supply content to all the premium global platforms as well as to local single territory linear networks, local single territory streaming networks and traditional theatrical distributors. Because of our scale, we're generally able to retain the underlying ownership of our IP as well as many downstream rights. In addition to shorter-term production margins, this also allows us to create a long-term valuable library, both for Endeavor Content and CJ ENM. Over the last several months, we've had a historic [ first ] for Endeavor Content with 7 movies being in production at the same time, after having just received 3 Oscar nominations early in the year for our title, The Lost Daughter. A few weeks ago, we received an EC record-breaking 27 Emmy nominations across our production, distribution and documentary groups, which is more than any independent media company, including [indiscernible] our #1 independent TV studio competitor. Across the 5 television series that we premiered in 2022 so far, 4 out of the 5 being picked up for a second season. We also had a limited series, which is a show that is only ever intended to be one season extended to make a sequel. Whilst last year's Omicron surge delayed productions across the industry, impacting our deliveries for this year, we've had an incredible pipeline of shows and films either in production or in preparation for production for 2023 delivery.

Few companies have assembled a slate with a level of movie star and brand name directors for all the major platforms in the way Endeavor Content has. With the continued need for star-driven U.S. and global content and the recent massive increase in global audience engagement around Korean language content, we truly believe that as part of CJ ENM, we are best positioned to both grow organically and build inorganically through acquisition, the largest scaled global independent studio over the coming years. Thank you for your time.

[Interpreted] Now the results presentation. CJ ENM's quarterly and yearly result numbers are K-IFRS consolidated numbers. Now 2022 Q2 results presentation. Good afternoon. This is Sung Ho Kang from CJ ENM's finance team. Our consolidated revenue in Q2 stood at KRW 1.1952 trillion (sic) [ 1.1925 trillion ], which is a 31.3% growth Y-o-Y, but our OP saw a decrease of 35.2% at KRW 55.6 billion. Thanks to the rapid growth of content sales, entertainment recorded a revenue of KRW 840.8 billion, with operating profit of KRW 36.1 billion. Revenue for commerce stood at KRW 351.7 billion with operating profit of KRW 19.5 billion. In the second half, the company will aim for growth driven by content production and increased global distribution. Our media business is working on the improvement of content hit ratio and original content investment. Commerce aims to see a recovery of profitability through product portfolio. Our pictures and music group businesses will strengthen lineup and music business has plans to increase in-house audit album release and content revenues. Page 6, Media. Q2 media business recorded a revenue of KRW 722.8 billion, which is a 58.4% growth Y-o-Y, continuing its top line growth. Content sales revenue also grew fast based on strong TV ad sales that came with content competitiveness and also with TVING revenue. However, operating profit decreased 56.0% Y-o-Y at KRW 25.4 billion. Profitability saw some temporary erosion with global and OTT business expansion, but the business fortified its fundamentals with increased global content sales revenue from Endeavor Content and profit structure improvement. The business will aim to strengthen profitability through premium IP expansion in the second half. We continue to enhance channels, OTT and digital channels. TVING will focus on subscriber increase with Paramount+, Endeavor Content and original library fortification. Page 7, commerce. Commerce business units revenue for Q2 stood at KRW 351.7 billion, which is a decrease by 1.6% Y-o-Y. OP at KRW 19.5 billion, saw a decrease of 34.7% over the same period. With more offline activities, live TV traffic decreased. However, digital revenue increased centering on private bank. Profit rate decreased over the previous year, and it was inevitable, but the business will focus on profitability recovery with high-margin products in the second half. The business will strengthen high-margin products, including beauty and health supplements and focus on private bank. Distribution channels for PBs will expand through brand digital shops such as CELEBSHOP and funshop. The business will aim to restore profitability with stronger GMV as well. Page 8, pictures. Pictures business revenue decreased 11% at KRW 25.6 billion. Despite the release of broker and decision to leave with lackluster domestic box office, the business recorded an operating loss of KRW 4.1 billion. The business will focus on profitability recovery with the release of the confidential assignment to international, timed for the Lunar Thanksgiving holiday and also a music lineup. Next, Page 9, music. Music business recorded a revenue of KRW 92.4 billion in Q2, which is an increase of 41.3% Y-o-Y. Operating profit also saw healthy growth at KRW 14.8 billion. Japan's Lapone's profit contribution was notable and the healthy sales of INI and JO1 album led revenue and profit growth. In-house artists, overseas album releases and concert tour in Japan will further enhance our global business. KCON in U.S. and JO1's Japan arena tour is planned at this ENHYPEN's world Tour. The business will sustain its growth momentum through more global concept. Next, we will be hearing the presentation from Studio Dragon.

[Interpreted] Good afternoon. This is CEO, Kyu Young Kim from Studio Dragon. I will brief you on Q2 2022 management results. Revenue in Q2 recorded KRW 157.5 billion. The number of titles aired increased by 7 at 13 titles. The results were good for dramas, including Our Blues that also led to good overseas sales. With that, our revenue grew by 48.5% over the previous year. Our operating profit recorded KRW 27 billion. Based on stronger bargaining power, we were able to improve the sales conditions of our new ad library titles. And with sales to new OTT platform services, we were able to grow our OP by 95.7% Y-o-Y, recording the best ever number with good growth. The company will continue platform expansion both home and abroad in the second half. We will continue to expand the [indiscernible] centering on global OTT originals and prebuys. In particular, things are becoming more concrete with our first Hollywood drama, The Big Door Prize. With this, our localization strategy centering around U.S. will roll out in earnest. Our first half focus on digital and global will add more substance in the second half and lead our growth going forward. Thank you.

[Interpreted] [Operator Instructions]

[Interpreted] Your first question will be given by Yu Incheol from Citi Securities.

[Interpreted] Yes, I have 2 questions for Endeavor Content. Well, what is the level of revenue and operating profit contribution to CJ ENM in the second quarter by Endeavor Content. I heard that there were some influences to your business because of COVID in the first quarter. So what was your contribution like for the second quarter? And how do you foresee your revenue and profit numbers in the second half? This was the first question that goes to EC. And now my second question also goes to EC. In your presentation, you've mentioned that you have already embarked on a dozen or more IP sharing projects with CJ ENM. Could you please elaborate more on these projects and how is your expectation for the above-mentioned projects? And are you working together with any other OTTs on these projects?

[Interpreted] So I would like to ask CFO, Park to address the first part of your question, and then we will also be inviting the CEOs from EC to give their forecast on the second half of this year and also on the plans. And on the second question, well, we would also like to hear from Studio Dragon followed by EC.

Yes. Now on the revenue numbers, it stood at KRW 224.6 billion and compared to the KRW 117.1 billion in Q1, it's an improvement by 91%. And as for operating profit, it's a negative KRW 6.2 billion. But compared to the previous period of minus KRW 17.8 billion, it's an improvement by KRW 11.6 billion. So far, the contribution is not that big. But as was mentioned by Chris in his presentation, Endeavor Content has an excellent delivery lineup planned and the time is going well without any glitches. As was mentioned in the first quarter, the lineup of the number of titles, it's somewhere between 13% to 15%. And when all these projects are delivered, we do foresee a good positive contribution from Endeavor Content in the second half.

Yes. We would also like to hear some comments from EC.

As we mentioned, we obviously recognize revenue and profit on delivery of shows. So the timing of shows is crucial for that. And the delays created by COVID last year impacted that, but we have a robust and growing pipeline both for now and certainly for the future. We've got some phenomenal projects going into production and in prep for next year. So feeling good about the pipeline. On your second question in terms of the synergy. These are all development projects at the moment. Typically, development projects will take maybe 12 to 18 months in that cycle, but we're feeling great about -- both about the way the teams are working together, but also about the prospects, the combination of the fact that both Korean language setting the audiences on fire, as we would say, around the world, that trend, combined with some of our work in being able to blend languages in shows, I mean, for example, Tokyo Vice, which we released earlier this year on HBO Max in the U.S. and networks around the world is a kind of perfect example of a high-budget premium show. In that case, it was 50% English language, 50% Japanese language approximately. And certainly, the largest television production to take place in East Asia by budget size. And it's the sort of confluence of all of these trends. And that gives us a huge amount of optimism for what CJ ENM and Endeavor Content can do both on the premium end, but also just on the volume end over the next 2 to 5 years.

[Foreign Language]

[Interpreted] So I would like to hear more from Studio Dragon on the coproduction side of things.

[Interpreted] Yes, Chris has already well covered the way we collaborate with each other. And there are mainly 3 tracts that we go by. First Studio Dragon can bring in IP of Endeavor Content and use it here in the domestic market. And secondly, while we have Hollywood drama and also new VIPs, which Endeavor could use in their territory. And the 2 companies can -- the 2 studios can work from scratch with the new IPs and with new works from our creators starting with novels or other IP sources. And so we could, from scratch, codevelop and co-plan new types going forward. And while Studio Dragon and CJ ENM is a pictures business, we have been embarking on in earnest on drama creation in the U.S. territory. And in the process, we could really enlist the help and enjoy the synergies that we do have with Endeavor Content.

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

[Interpreted] Yes. Once again, question goes to Endeavor Content. Studio Dragon now has mentioned the 3 types of joint work that you could engage in all the 3 types. And if you can elaborate on these tracks and if you could give us any concrete examples that would much be appreciated. And the pipeline, the number of [ 13, 15 ] was mentioned during the presentation and during the answer and what is the projected mid- to long-run lineup number of titles perhaps in 3 to 5 years? And what is the expected revenue generation from these projects? And now the question goes to CJ ENM, you have upward adjusted the revenue outlook, but the operating profit guideline or projection, it remains the same at KRW 27 billion. Why is that so? So that was my second question. And now my other follow-up question goes to Studio Dragon. Well, I know that your contract with Netflix is nearing the closure? And do you have any time to renegotiate the contract with Netflix? And if so, on what terms and conditions? And once again, a question to Studio Dragon. In your presentation, you've mentioned about the stronger bargaining power with platforms. Could you please elaborate on what you mean by a stronger bargaining power? And on Page 9 of your presentation, well, I think there was some contract mentioned with OTTs, Amazon Prime I think it is. So could you please give us more color on that contract as well?

[Interpreted] So I would like to ask Endeavor Content to address the first question. And I would like to ask CJ ENM CFO, to address the second question, followed by the third answer, which will be addressed at by Studio Dragon.

Sure. This is Chris again. I'm not going to get into much detail on this. I'm afraid, just it's very early on in the development cycle and certainly not going to get into revenue projections on these shows at this stage. What we can say is, we've acquired together with either Studio Dragon or CJ ENM Studios multiple bits of IP books, et cetera, that we have bought together and are starting to develop in script stage. And we've taken multiple existing film and television titles where we are either sort of treated members of format and re-adapting them for a different market or where we're kind of taking an extension of what that existing film or television title is. So quite a few different lanes and feeling really good about the pipeline. [Foreign Language]

[Interpreted] And now to the second part of your question, which was on our guidance revision. As you've mentioned in our disclosure, we have upward adjusted our revenue guidance by 11.8% at KRW 4.8 trillion. It was mainly due to consolidation of Endeavor Content numbers. However, having said that, our operating profit guidance remains the same at KRW 27 billion. Well, as was mentioned during the presentation, the contribution -- profit contribution from Endeavor Content in the first half is yet limited. So that is the reasoning behind us in maintaining our previous position when it comes to our OP projection. However, in year '23, we will see more contribution in terms of profit from TVING and EC. And with that, we will be seeing an adjustment to OP guidance as well.

[Interpreted] Third answer, please?