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 fourth quarter on results by CJ ENM. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we'll shall commence the presentation on the fiscal year 2022 fourth quarter on results by CJ ENM.

[Interpreted] Yes. Hello. This is Kay Choi, Head of IR at CJ ENM. I would like to express my deep appreciation to all shareholders and analysts joining us at our earnings call despite your busy schedule. We will now begin the fourth quarter 2022 Earnings Conference Call for CJ ENM. Please be kindly advised that the financial results and business performance presented today are unaudited and may be subject to partial change upon review by an independent auditor. Today, we are joined by CEO, Mr. Koo Chang-gun, the Head of the respective business lines; Mr. Hwang Deuk-Soo, CFO and Head of the Management Support Office; Mr. [indiscernible] EVP from Management Support; Mr. Kim Jey-Hyun, CSO, Head of our growth strategy; Mr. [indiscernible] head of Media, Mr. [indiscernible], Head of Pictures; Mr. [indiscernible], Head of Music. Also Mr. Steve Chung, Head of our Global Business; Ms. Kim Jey-Hyun, CEO of Studio Dragon; Mr. Yang Jieul, Head of CEO -- excuse me, of TVING; and Mr. Chang-Gun Koo, CEO of CJ ENM Studios. We will now begin with the presentation by the CEO on our business strategy.

[Interpreted] Yes, greetings, this is Koo Chang-gun, CEO of CJ ENM. I believe this is the first time I am greeting you in this capacity. Very nice to meet you. I would like to acknowledge that I understand that there are both a mix of expectations and concerns in the market regarding CJ ENM and myself. So today, I would like to take a few minutes to speak at a high level about the changed strategic directionality of our company. Because of the time and spatial constraints today, I think that we will have to reserve more detailed discussions for a later occasion, and I'll try to share greater details with you at the next opportunity. So as you know CJ ENM is an integrated media and entertainment company that is engaged in wide range of content-related business across full value chain from planning, production to distribution. And we are witnessing very rapid change in the business environment of our industry. Certainly, due to changing viewership behavior, shifting towards OTT, there is now a declining demand for linear TV or film -- theater viewership with the resulting slowdown in the broadcasting and advertising market weighing on CJ ENM as well as a source of crisis. That being said, as a media player with direct ownership over a D2C platform that includes OTT, I believe this presents major opportunities for us as we can interact directly with our consumers. And from the context of consolidation across the global OTT media market, driven by OTT, I think that growing global demand for K-content also represent positive change for us in the evolving market environment. So let me briefly take you through our strategic directions to advance into a true global IP powerhouse as we respond proactively to the changing environment. Yes. First, in terms of content IP, we intend to build a robust system for content production and create a creative ecosystem that will allow us to produce content that is global competitiveness. Uptil now, we have focused on strengthening our production capabilities by working together with competent creators or by strengthening our production infrastructure. But going forward, we would like to evolve to create more compelling content with global competitiveness. Our focus will be on securing original mega content IP while also establishing a data-driven production system, expanding collaboration with the wider creator ecosystem to again create compelling global content with appeal. We'll also look to strengthen globalization, not only of drama content but unscripted [ variety ] show, head content as well by introducing very diversified production system and environment. Yes. Second, we wish to strengthen the functionality of our TVING platform. Yes, it is true that in qualitative terms, the TVING platform did record a strong performance mostly in subscriber gains. But I believe that in terms of convenience of our UI/UX or in terms of the delivery of our content to our customers in an effective manner, I think that there were many shortcomings relative to our peers and certainly, room for improvement in terms of customer retention. We want to address this issue fully and again, focus on improving retention of users who come to us while increasing -- systematically increasing the price of our services and overall strengthen our competitiveness as a strong platform provider. Also, when we look at the growth path of global streaming service providers, it does seem convergence between platform and content appear to be an unavoidable trend. So at CJ ENM also, we wish to evolve beyond the current focus around existing content and transition into a platform business driven by TVING growth -- that growth using our D2C platform as a direct interface to get to know our customers and accumulating -- while accumulating customer data. And third is to strengthen our position within the music industry. So we have a very unique asset in the form of our Mnet channel, and we will be using that asset to build out our music business in and outside of Korea. For example, Japan Lapone, will be introducing new auto groups this year. We'll be able to generate a lot of growth momentum we expect. And in the mid- to longer term, we seek to solidify a leading position in the music sector, but not only through idle groups, as we wish to develop additional music IP with genuine musical appeal across different genres. We will also continue to advance our digital Mnet Plus platform and our KCON, MAMA offline platform to further reinforce CJ ENM's music ecosystem. And fourth is to maximize earnings by changing the structure of our content distribution system. At CJ ENM, we have the strongest production capacity in Korea. By leveraging these strengths, we will seek an optimal mix in distribution volume between CJ ENM's own platform and third-party platforms, again centered on maximizing profitability. We'll also diversify our global distribution channels, enhance our pricing scheme to build distribution capability that is on par with global majors in the near term. We'll also increase our influence in the industry from an IP ownership and hold perspective to contribute more to maximizing profitability. Yes. And finally, is our profit-driven management. In the past, despite CJ ENM's unique competitiveness in content production, there were some shortcomings in terms of weaknesses in certain business areas as well as issues in terms of management of costs or the organization. In the future, we will focus on more efficient management and optimize investment of resources, again, from a profit-oriented perspective. As you may have noticed from the recent restructuring, we actually want to give more accountability and initiative to the respective leaders of our individual business units to establish a very systematic process of moving quickly on decision-making. And once they started, we want to really execute quickly as well. That is the direction in which I would like to evolve our organization toward. We also achieved better financial soundness by securitizing noncore assets and also working to continue to deliver maximum shareholder value. So I have again taken you through a high-level strategic direction for CJ ENM. It was not intended to be detailed, but I hope to have more opportunity in the future to discuss further details about our strategy and also implementation actions later on. And I would like to close by making two final comments. First is your understanding that CJ ENM is in a long-tail business that requires longer time interval to build and to evolve, so creating content, for example, may take anything from 1 year to 1.5 years. And in fact, this year's content lineup was actually already decided when I joined and came over to CJ ENM. While I understand that it is a very important task for us to respond very quickly to changing industry trends, I must say that the actual pace of change from CJ ENM may be slower versus market expectations. But again, I would like to remind you, this is just a characteristic inherent in our industry. And moreover, CJ ENM is in the business of investing capital and human resources, utilizing our production processes to plan, produce, post-produce and distribute market content to find [indiscernible] viewers to enjoy our content. The output of this production process actually goes beyond simple accounting or financial money terms. There are significant other output gains such as a robust portfolio of content IP that we can accumulate as a content player, human resources that are fostered in the course of our business, also our collaboration with the outside ecosystem, and ultimately, a more evolved content creation process. The sum and combination of all of these input factors then circle back and become inputs for the next fiscal year. So certain outputs like short-term earnings may be at a trade-off with other outputs like content IP or fostering of human resources. So the strategic challenge that I faced as a CEO in the mid- to longer term is what exact mix of output factors we should choose to focus on and aspire to achieve. Given the trade-offs, maximizing short-term profits can undermine our mid- to long-term sustainability, and therefore, I have no choice but to be very prudent in choosing amongst our available options. So again, while I fully realize that the market may have quite high expectations from me and the company, I would appreciate if you could take these 2 [indiscernible] into account and think of a more balanced view as CJ ENM embarks on evolving our business strategy going forward. So this concludes my comments for today, and I look forward to speaking to you at my next opportunity.

[Interpreted] Next, we'll move on to a presentation from our CFO, Mr. Hwang Deuk-Soo, to highlight our business management's goal for 2023.

[Interpreted] Yes, this is Head of Management Support Hwang Deuk-Soo. Moving into 2023, we will work to restore competitiveness of our business by reinforcing our lineup of premium IP and also enhancing the profitability of our distribution platform with a particular focus on profitability-based management. We aim to maximize our entertainment business earnings by strengthening global IP and our TVING platform while expanding distribution. On the e-commerce, or excuse me, on the commerce side, we will improve the competitiveness of our product offerings and brands and expand GMV through our one platform strategy. TVING is enjoying enhanced status as a strong video platform, and our target this year is to achieve 5 million paid subscribers while seeking to demonstrate meaningfully improved margins based on the strength of our strong services, which are built on our competitive content and also by advancing our marketing strategy. Our goal is to achieve 40% plus growth in content sales as we ramp up our advancement into the global markets rather than being complacent and content with our #1 position in the domestic market. For our music business, we are looking to deliver strong growth, primarily around Japan and the Asian market, increasing the share of overseas sales to more than 50% of our total revenue mix and continuing earnings growth driven by a strong pipeline of new artists scheduled to debut this year and also by growing our music album and concert business. On the commerce front, we seek to recover profitability driven by our one platform strategy. We'll also solidify our merchandise sales and brand competitiveness, not only in TV commerce, but also expand our digital and offline distribution as well as a brand play. And also lastly, in 2023, we would like to improve our cash flow through more efficient allocation of resources and tighter cost controls. We will also strengthen financial soundness by securitizing noncore assets. Page 5 outlines our new content lineup. This year, program content such as Crash Course In Romance and Our Blues reviews have been creating a big buzz among our viewers, and we are targeting a significant contribution in traffic from TVING original content like Island and also Duty Afterschool. In 2023, we will continue to grow our media platform on the strength of our overwhelming content capabilities. Thank you.

[Interpreted] Yes, next, we will move on to our financial results. Please be reminded that CJ ENM's quarterly and full year financial statements, our consolidated results based on K-IFRS. We'll now report on our company-wide business performance for the fourth quarter 2022.

[Interpreted] Yes. This is [ Hong Sung Woo ] from CJ ENM's finance team. The fourth quarter consolidated revenue was KRW 1.464 trillion, up 47.1% year-on-year while our operating profit declined by 77.7% recording KRW 6.6 billion. Full year revenue was KRW [ 4.792 ] trillion, up 34.9% Y-o-Y, while operating profit for the full year was down 53.7% at KRW 137.4 billion. Drivers of top line growth include a solid rise in the number of TVING paid subscribers and also content sales as well as stronger performance by global artists. In contrast, the biggest driver behind the drop in operating profit came from operating loss from Fifth Season -- TVING -- [indiscernible] performance. In 2023, we will be increasing our TVING subscriber base and achieving greater production cost efficiencies to improve our media earnings. We also want to increase new artist debuts and concerts to drive continued earnings growth in our music business. Please refer to the handout for further details by business area.

[Interpreted] And we will move on directly to the performance results for Studio Dragon.

[Interpreted] Yes, this is CEO of Studio Dragon. My name is Kim Jey-Hyun. I will take you through our management results for the fourth quarter 2022 as well as full year 2022 results. Fourth quarter revenue was KRW 190.5 billion, up 28.8% year-on-year driven by global OTT original content. Operating profit recorded KRW 1.2 billion on rise in copyright amortization costs as well as other nonrecurring one-offs, including amortization of PPA -- and also, this was from our production house acquisition, by the way, and also incentive payment. In 2022, we strengthened our global reference base with 9 of our works, making it on to the Netflix global top 10 list and achieve meaningful growth in both quality and quantity by diversifying our platform across multiple OTTs. As a result, our full year revenue was KRW 697.9 billion, up 43.4% year-on-year with the share of overseas revenue growing to 52.8%. Operating profit was KRW 65.2 billion, up 24% year-on-year. Looking to 2023, we will focus on improving our business environment and completing our globalization initiatives. We demonstrated our better and improved bargaining power in renewing our contract with Netflix, thanks to the increased cloud that our strong contents have given us. And we're just about to sign a large volume contract with a new OTT. Our globalization drive, which started off with The Glory will be followed with numerous premium IP in the pipeline and also season-based programming to maintain a hot growth momentum. As a follow-on to The Big Door Prize, we will continue our localization efforts, focusing on our U.S. drama to deliver stable results while also working hard on our local projects in Japan so that they can materialize. In 2023, this should be the year when Studio Dragon can come full circle and complete the globalization loop to anchor itself on a pathway for higher growth.

[Interpreted] Yes. Thank you very much. Next, we will move on to the Q&A session, and we ask you to focus your questions on major issues.

[Interpreted] [Operator Instructions] Currently, there are no participants with questions. [Operator Instructions] The first question will be given by [indiscernible] from [indiscernible] Securities.

[Interpreted] This is actually Kim from Daishin Securities. I have a question first regarding ENM. I think during your conference call earlier at the third quarter -- or during the third quarter last year, you provided full year earnings guidance. It does appear that you missed the guidance for the fourth quarter. Do you believe that this was due to mostly a one-off factors, or was there any change to the market environment that you had not expected or thought of? If you could explain that further, I would appreciate it. And the second question has to go to Studio Dragon. I think somewhere on Page 11, you suggested that per title production costs may increase by more than 30%. Does that apply to all titles that will be in the works this year? Or do you mean that, that may be the case for some major work? And overall, your top line looks quite good, but could you provide your outlook in terms of the underlying profitability?

[Interpreted] So in the fourth quarter, it is true that we did see actually weaker performance than originally expected. So actually, we saw an increase in the number of TVING subscribers and also saw an increase in content sales. But overall, it was the downturn in the external environment that led to a contraction in the high-margin TV advertising business. And also, there was an increase in content production costs that weighed on our profitability in the fourth quarter. But overall, in other nonmedia businesses, we did very well. For music, driven by concert growth, we saw really record-high revenue in the fourth quarter. Also, a very strong top line and bottom line performance, in films as well driven by overseas exports. And there were also cost savings measures that led to a profitability improvement in certain business units. So overall, it was mostly due to the factors that I mentioned, specific to the media business. But if we assume that the market -- medium market, improves going forward, we can actually focus on growing our TV advertising sales more on a full-fledged basis in 2023. And in that case, we would see our performance improve.

[Interpreted] So regarding the expected increase in production costs. So you are right in that, that would apply for the major work mostly. So the large-scale titles that we will provide to the OTT platform, for example, those are the ones that may -- or are expected to see perhaps over 30% increase in production costs.

[Interpreted] Following question is by Kim Sunghwan from Credit Suisse Securities.

[Interpreted] Yes. This is Sunghwan Kim from Credit Suisse Securities. I also have a question for Studio Dragon. I think in the presentation materials, you had certain target in terms of the number of titles you would like to produce this year. And it seems that more than half are digital format. So I was wondering whether this change in the mix could lead to further upside in improving your margins. Because I know that compared to season 1, season 2 or season 3, sequel works for OTT platforms since they have stronger margin profiles. So as the portion of OTT increases in the mix, do you expect upside to your margins? I asked because in the third quarter, if you look at your OP margin, it's actually about half of what it was in the first and second quarter. So if we want to maintain, for example, if we assume operating profits remain at the current level, and we want to maintain current margins, that would mean that the top line revenue would have to grow by more than double. So what is your take or outlook in terms of profitability going forward for Studio Dragon?

[Interpreted] So you are correct. As we do season-based work with every sequel season, it is true that we see improved margins for the later season. And also, when we renewed our -- or when we entered into new contracts with OTT players, we're able to negotiate better favorable terms than before. And so I would say that we expect continued growth in 2023, both in terms of quantity and quality.

[Interpreted] The following question is by Choi Yong Hyun from KB Securities.