Studio Dragon Corporation (A253450) Earnings Call Transcript & Summary

Good morning, and good evening. First of all, thank you all for joining this conference call. And now, we will begin the conference of the fiscal year 2026 second quarter earnings resulted 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 2026 second quarter earnings resulted by CJ ENM.

[Interpreted] Good afternoon. This is [ Woo Won-sung ] from CJ ENM's IR team. I thank the shareholders and analysts for their attendance despite your busy schedules. Now, we will begin 2026 Q2 earnings 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. We have here with us CFO, [ Kim Jin-young ]; and heads of different business divisions. From platform, we have [ Lee Nam- Joo ]; from Media BU, [ Park Sang-hyung ]; from Media Solutions, [ Lee Sang-mu ]; from film, [ Jung Hyun-joo ]; from Content Distribution, [ Kim Jo-hyun ]; from Global Business Management, [ Kim Joo-young ]. From Music, we have Ms. [ Ko So-hyun ]; from Commerce, [indiscernible]. From Studio Dragon, we have Ms. [ Lee Hye-mi ]. And from TVING Business Management, we have Ms. [ Kyung Young-jang ]. And we have CJ ENM Studio CEO, Hwang Deuk-soo with us. First, CFO, [ Kim Jin-young ], will present on our major results and business strategy.

[Interpreted] Good afternoon. This is [ Kim Jin-young ]. In Q2, the company continued to further refine our growth structure by diversifying revenue generation methods for content and artist IP, while continuously expanding the foundation of our platform businesses, including TVING, Mnet Plus and Commerce. As a result, our operating profit in the second quarter increased by 17% Y-o-Y. First, our content business. CJ ENM is continuing to transition to a high-efficiency, profit-expanding IP business structure that expands a single IP into various businesses, alongside production efficiency improvements. A representative example is The Legend of Kitchen Soldier, where we reduced production costs through efficient casting and the use of AI-based CG and VFX. At the same time, we expanded our revenue model through the release of album by the Tasty Boys or Migak Boys, the boy band in the drama, and the commercialization of convenience store lunch boxes based on in-drama recipes and virtual [indiscernible] uses AI technology to naturally insert products and brands into the video during the post-production editing stage. We are strengthening our profitability-oriented production system through close collaboration between the content production and advertising sales department, starting from the planning stage. And we will continue to enhance the revenue generation capabilities of our IP in the future. The music business is strengthening its mid- to long-term revenue base through the advancement of its Human IP portfolio, or HIP. It has rediscovered the value of existing HIPs by successfully rebooting the highly successful groups of the past 101 and I.O.I. Furthermore, while the new Human IP group, Modyssey, made a successful debut, Produce 101 Japan Season 4 also saw high popularity and commercial success with its concept album reaching #1 on the Apple Music Top 200. The group KO1KEYZ selected through this process is set to debut in the second half of the year and is expected to contribute to Lapone's earnings, alongside existing artists such as JO1 and INI. Next, on the platforms, in the case of TVING, platform-based expansion for digital transformation is well underway. Driven by the success of KBO and original content, the number of subscribers continues to increase and customer base growth has continued too, with MAU recording 9.7 million. Advertising revenue continued its high growth trend, increasing by 52% Y-o-Y. Mnet Plus is evolving into a platform that connects global fandom traffic beyond content viewing and engagement to paid consumption. Through the strengthening of fan interactive features such as paid content business model like [indiscernible] IP Wanna One Go content pass and the earnest launch of digital fandom business, including ALD1 Japan fan club, Mnet Plus revenue continued its high growth rate of 167%. Amid the sustained high growth of mobile live commerce, the commerce business is steadily expanding its customer base. By organically integrating short-form content, live broadcast and creator commerce to increase traffic from external platforms and convert it into actual product purchases, the transition to mobile-centric platform is accelerating. Consequently, not only is the transaction volume of mobile live commerce increasing, but the number of app downloads and monthly active users is also rising. CJ ENM will continue to strengthen its competitiveness in these content and platform sectors. And through this, we will strive to achieve revenue growth and improve profitability in the second half of the year [indiscernible]. I would like to thank our shareholders and analysts for their support of CJ ENM. And this concludes my presentation.

[Interpreted] Next is the company's results. CJ ENM's results are based on K-IFRS. Consolidated numbers and divisional operating results have not carved out internal transactions. Now, the company's 2026 Q2 results. Next, I will discuss the earnings for the second quarter of 2026. Revenue was KRW 1.2033 trillion, a decrease of 8% Y-o-Y, while operating profit was KRW 33.4 billion, an increase of 17% year-over-year. I will now go over the changes in operating profit by business segment based on figures prior to consolidation adjustments. The entertainment business saw profit growth driven by factors such as continued revenue growth of TVING despite disruptions in the Fifth Season TV series and the impact of investment in music, HIP and platform. Our commerce business achieved growth both in revenue and profitability due to the [ sustained ] high performance of mobile live commerce and strategic product operations, including category mix optimization. Starting from Page 5, I will present the performance by business segment and give you the outlook for the second quarter. While TV advertising revenue experienced negative growth in the media platform sector due to the continued contraction of the market and selective advertising execution during the World Cup season, earnings were driven by sustained net TV subscriber growth with the success of KBO and original content, high growth in digital advertising revenue and robust overseas sales, including the branded zone. Although TVING is expected to face a slightly increased cost burden in the second half of the year due to content procurement, we will respond by continuously expanding subscribers and viewership based on original dramas and anchor and nonscripted formats and specifically, by maximizing advertising revenue during the KBO post season and peak season in the fourth quarter. For channels, the company will strengthen advertiser-tailored, bundled ad product campaigns centering on core IPs and stronger cooperation between content production and advertising business and expansion of AI-based advertising products to secure more advertising sales and improve [indiscernible]. Overall performance in the film and drama sector declined despite increase sales to leading to leading local platform, robust growth in branded zone sales, overseas sales of nonscripted formats and production cost efficiency improvement due to the impact of the delivery gap in drama series from Fifth Season. In the second half of the year, we will continue to strengthen our competitiveness based on anchor IPs by reinforcing volume deals and individual sales in existing key markets such as Japan, Southeast Asia and North America, while simultaneously seeking out new partnerships in local markets, including India, the Middle East and South America, and expanding the supply of dramas and variety shows to global OTT platforms and terrestrial broadcasters. Music sector sales grew steadily with strong performance of Modyssey debut album and with the activities of [ current ] and new artists such as INI and ZEROBASEONE Season 2. Although investment costs increased for the growth of Mnet Plus and the debut of new artists, profitability was partially defended through global live events such as ALD1 Fan-Con Tour, JO1 Dome Tour and KCON Japan. In the second half of the year, growth momentum is expected to become more pronounced as album releases and tours by Lapone's artists like JO1 and INI increase and activities of new Human IP, including the debut of KO1KEYZ and album release by ALD1 and Modyssey enters full orbit. Furthermore, we will continue to strengthen our competitiveness through the diversification of Mnet Plus s anchor IPs and business models, alongside the success of Street World Fighter: Directors' War and the advancement of global events such as KCON LA and MAMA. Sales increased in the commerce sector as mobile live commerce transaction volume continued its high growth trajectory, driven by increased social media sales and new customer acquisition through the quantitative and qualitative expansion of short-form content, as well as robust growth in the premium travel and kids categories. Simultaneously, we demonstrated improved profitability by expanding our programming centered on high-margin categories such as health supplements and beauty. In the second half of the year, business will expand its external customer base by establishing a collaboration system with [ on-staff ] partners, including influencers and brands, and by further enhancing our creator commerce model. Additionally, we will steadily expand our customer base by increasing customer influx and loyalty through differentiated IP collaborations and membership programs, while building a customer lock-in system through advanced CRM and notification. For further details, please refer to the material. Thank you. Now, we will hear from Studio Dragon.

[Interpreted] Good afternoon. This is CFO, Lee Hye-mi from Studio Dragon. I will report on our business performance for the second quarter of 2026. In the second quarter, Studio Dragon strengthened our growth trajectory despite a challenging environment, based on the advancement of business strategies such as production efficiency, content diversification and success of our major works. Major titles such as Teach You a Lesson, The Legend of Kitchen Soldier and Yumi's Cells 3 recorded overwhelming performances across their respective platforms. In terms of profitability, the refection of production cost efficiency and expanded sales led to improved earnings. Accordingly, revenue grew 26.9% year-on-year KRW 145.3 billion and operating profit turned positive at KRW 15.4 billion. Furthermore, the operating profit margin improved by 13.2 percentage points year-on-year to 10.6%, confirming a trend of profitability recovery. In addition, starting from Q2, we changed the criteria for the useful life of intellectual property rights to reduce quarterly earnings volatility and enhance predictability. In the second half, we will continue the growth momentum of our core business based on the lineup of blockbuster titles and expanded presales. We will expand our viewer influence through highly anticipated titles such as Four Hands, 100 Days of Deception and Tantara and respond to changes in the external environment by expanding our IP business and optimizing production costs. We will simultaneously strengthen the profitability of our core business and our foundation for mid- to long-term growth. Thank you.

[Interpreted] We will now be entertaining your questions. [Operator Instructions]

[Interpreted] [Operator Instructions] Currently, there are no participants with questions. [Operator Instructions] The first question will be given by Lee Ki-hoon from Hana Securities.

[Interpreted] Yes, I have 3 questions. First is on the TV ad business. Well, you in your presentation mentioned that you had some environmental or seasonal difficulties in the first half because of low seasonality and especially with the World Cup games. But since Korea was eliminated from the World Cup games rather earlier than anticipated, how did it impact your ad business? And I would also like to hear the impact from the happenings with JTBC. Well, I'm told that there won't be much production activity going on with JTBC after the fourth quarter. Could it actually be a positive factor to CJ ENM as we may gain some of their ad revenue? So could this possibly be a positive thing for the company? And well, now my second question is on the merger between TVING and Wavve. I know that there are issues, the KT issue and SI issue. So could you give us more color or some more information on how the integration work is going on? And my third question goes to Studio Dragon. You've mentioned in your presentation about the changes in the amortization method of your intellectual property. Could you give us more color on what's happening there?

[Interpreted] Yes. First, answering your advertisement industry-related question, yes, as you rightly mentioned, the first half of the year was a difficult half. But starting in the second half of this year, after the World Cup games, we believe that things will see a turnaround. For the company, CJ ENM, we do expect to see an upsell of over 30%. It's because we're the only entity that has a full integrated lineup of TV broadcasting advertisement to digital advertisement, to also include DOOH. And we, because of this integration, expect to see better results for CJ ENM. And we also have high expectations for sponsorships and PPL. We expect to see about 26% growth on a Y-o-Y basis. And now, to your second point related to the disturbances at JTBC, well, I cannot give you an exact answer to this question, but we are seeing some revenue decrease on the part of JTBC starting from the month of August. And it has influenced some of the terrestrial players, plus the company as well. But as to how much or to what degree, I cannot give you a concrete answer today, but we are seeing some pickup in our market share. So to address your TVING and Wavve integration or merger-related question, well, we are currently discussing with KT on advertisement and content activities. So we [indiscernible], we believe our discussion will enter into a more full orbit starting in the second half. And by then, we will be sorting out how things go with SLL and the merger process.

[Interpreted] Yes, [ regarding ] answering your useful life amortization question, well, we have made adjustments to the useful life amortization process with our copyrights. Well, for conventional dramas, it used to be 18 months of amortization of our production cost. For OTT presales, it was over 6 months, but it really did not reflect our revenue-generating period. And the amortization process was rather lengthier than the actual revenue generating period. And because of this, there was some added volatility to our profit numbers. So we had made the necessary adjustments to more fully reflect the real revenue to our schedule. So for general dramas, it will be amortization of copyrights over first 8 months, but it would be on an accelerated basis for the first 7 months. So about 54% of the amortization will be done in the first 7 months. So it's an accelerated process. And for the presale titles to the OTTs, the amortization period has been decreased from 6 months to 4 months, which will, of course, lead to more accurate predictability on the part of the analysts and shareholders, and it will lessen the volatility associated with our numbers. For example, our Q1 numbers for this year because of the spillover of amortization process from Q4 last year, our profit numbers were rather smaller than what you might have anticipated. And to address this situation, we have made the necessary adjustment to our amortization process.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The following question is by Choi Hyun Yong from KB Securities.