Good afternoon. This is Kay Choi from CJ ENM IR. I thank the shareholders and analysts for their participation despite your busy schedule.
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Now, we will begin the earnings presentation for Q3 2023 of CJ ENM. Please note that the financial and management results presented today have yet to undergo an independent audited review and could be subject to changes upon such review.
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Today, we have here with us CFO Duk Soo Hwang and heads of different business divisions. From media platform, we have Hee Seong Hong. From film and drama, Kyoung-boum Ko. From music, Joon -beom Sim. And from commerce, we have Sung Bae Park. From Studio Dragon, we have CEO Jey-hyun Kim. From TVING, we have CEO Ju-hui Choi. CJ ENM Studios CEO Yong -soo Ha is also with us, as well as Steve Chung from global business.
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First, CFO Duk Soo Hwang will go over major results and business strategies.
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Good afternoon. This is CFO Duk Soo Hwang. Despite the difficult market conditions home and abroad, CJ ENM begun our profit turnaround with positive operating profits in Q3. Our revenue recorded KRW 1.1109 trillion with operating profit of KRW 7.4 billion. TVING and FIFTH SEASON's profit improvement led profit recovery for entertainment despite the stagnant advertisement and pictures business. Commerce business also defended itself against market headwind of a low season with brand differentiation such as fashion vertical strategy.
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With strongly driven midterm strategy, the company's planning to focus on business growth and profitability improvement. We will continue to strengthen premium content, such as non-scripted entertainment and drama, and enhance profitability with expanded global distribution. With subscription format review and ad-based AVOD introduction, TVING will add diversity to its catalog. It will further grow into a more competitive platform with stronger originals and libraries. The market shutdown situation is easing for FIFTH SEASON, and with that, the business will focus on content delivery with production normalization.
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Management success, as illustrated with ZEROBASEONE and A&R business, will further enhance our music business. Music will see earnest growth with expansion of global markets, in-house artists, production, and concerts. I thank the shareholders and analysts for your support during an adverse environment. Thank you.
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Next will be the results presentation. Quarterly and yearly results are mainly based on K-IFRS consolidated numbers. YoYs are on a pro forma basis, and the divisional operating profit numbers include internal transactions. Now, we will begin the third quarter earnings release for CJ ENM.
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Good afternoon. This is Sang Muk Hwang from finance. Entertainment in Q3 realized a turnaround with revenue of KRW 810.5 billion and an operating profit of KRW 300 million. Despite the sluggish ad market, media platforms saw profit improvements based on TV and paying subscriber and traffic growth. The box office was sluggish, but pictures continued to receive sales tax growth with expanded global distribution. ZEROBASEONE's debut was a success, recording a double million-seller, leading global live sales growth. Revenue from commerce stood at KRW 300.3 billion, which is a slight decrease of 2.9% YoY, but its operating profit grew 23.2% at KRW 7.1 billion. The profitability was well defended with portfolio strengthening strategy focusing on big brands.
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Global revenue will continue to see a growth based on content and artist competitiveness in Q4, and further add to profit improvements. Commerce will also concentrate on profitability recovery, focusing on fall-winter high season effect led by fashion brands. Please refer to the document for further details. Thank you.
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Now we will be hearing from Studio Dragon.
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Good afternoon. This is CEO Jey-hyun Kim from Studio Dragon. I will go over the management results of Q3 2023.
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Revenue decreased 5% YoY at KRW 217.4 billion. Global OTT original sales increased 40.8% YoY, and overseas sales increased 8.9% during the same period, recording the highest overseas revenue number ever.
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Operating profit grew 15.4% YoY at KRW 21.9 billion, and the company successfully transitioned its major profit source to the global market.
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The company will enhance its global presence in Q4 with focus on TV and also OTT drama hit ratio improvement.
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TV content viewership concerns will be dispelled, starting with Castaway Diva. Studio Dragon will cement its position on the global stage with original mega titles such as Sweet Home 2 and Gyeongseong Creature. Thank you.
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Now we will be entertaining your questions. In consideration of time limits, please focus on core issues, and we would appreciate it if you limit your questions to three each.
[Non-English content] Now Q&A session will begin. Please press asterisk one, asterisk and one, if you have any questions. For cancellation, please press asterisk two, that is asterisk and two on your phone. [Non-English content] The first question will be given by Kim Hoi-jae from Daishin Securities. Please go ahead.
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I have two questions. First question goes to TVING. You have introduced some changes to your subscriber scheme and also introduced the AVOD system. It was market expectation that your subscriber base would reach somewhere around 4 million by the end of this year and go up to 5 million in 2024. The market expected that with that amount of subscriber base, the company would reach a BEP. But with your introduced strategic changes, will this outlook change? Could you please give us guidance as to when you expect to see a break-even point? The second question goes to Studio Dragon. Could you please give us an update on your overseas projects? You've given us a number of 17% of overseas revenue contribution in the third quarter. Do you think this level of overseas contribution is sustainable, or is it a one-off thing? Could you please give us the directionality?
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This is CEO Ju-hui Choi of TVING speaking. By the end of this year, we do expect to see a 4 million strong subscriber base, which is a 50% growth over the previous year. We are seeing a little bit later realization of our break-even point because the number of subscribers grew majorly thanks to our alliance partners. With that, our ARPU was relatively lower. Our original content did not really meet our expectations. Going forward, as was mentioned in our presentation, we will be introducing new ad schemes, which will enrich our profit sources. We are also going to introduce the AVOD system. In the second half of next year, we do believe we will reach a break-even point.
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Now we will be hearing the answer for Studio Dragon.
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This is the answer provided by Studio Dragon. On our global project, we do believe a pilot order will soon be coming from Amazon. As you're well aware, the Writers Guild strike in the U.S. has somewhat influenced our project. But with that coming to a closure, we do believe that this pilot order will soon be back on track. We also have plans for the participation of top Korean creators directly in global projects. I cannot give you any title names as of today, but we have certainly set up plans for that. With that, we will be seeing a continuation of our overseas contribution to our overall revenue numbers. We are maintaining our good relationship with existing global streaming companies. On top of that, we have gotten excellent results with the local and regional platform players, and that has been reflected in our revenue numbers, leading to a higher contribution from our overseas businesses. We believe the directionality will be maintained going forward because we will be maintaining our position when it comes to our global businesses.
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[Non-English content] The following question is by Shin Eun-jung from DB Financial Investment. Please go ahead.
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My first question goes to TVING and FIFTH SEASON. I see the operating numbers are better than expectation. Do you think this is a sustainable level? What is your expectation for the operating numbers in Q4 and year 2024 as a whole? My second question is specifically for FIFTH SEASON. What was the number of delivery in Q3 and also in Q4? Could you give us a yearly guidance for year 2024 as well?
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Yes, I will give you a general answer when it comes to our operating numbers, and I will then ask the department heads to give more color on the department works.
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I will give you numbers for TVING and FIFTH SEASON revenue. For TVING, it was at KRW 78.0 billion with operating numbers of KRW 31.2 billion. That for FIFTH SEASON is at KRW 97.4 billion with KRW 12.3 billion operating numbers.
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On a pure Q2 basis, the loss decreased by KRW 37 billion, leading to a turnaround. For divisional information, I will ask the division heads.
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As for TVING, would we be able to sustain our operating numbers? As of now, the subscriber scheme will change. The change will be reflected in earnings starting December. The new subscribers will be going by the new payment scheme or the new subscription scheme. The price increase will also apply to our existing customers starting Q1 2024. As was mentioned, we will be introducing AVOD, which will lead to advertisement profit. Through that, we will be seeing an overall profitability improvement for our business. On a quarterly basis, we do believe that this positive turn is sustainable.
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This is the answer provided by FIFTH SEASON. You've asked on Q3 delivery and our expectation for Q4 delivery. As you're well aware, the strike in the U.S. has been continuing for more than six months, leading to production disruptions and even shortage. With the situation in place, the number of titles delivered was not really to our expectation, but as was mentioned in the presentation, we did see a turnaround in Q3. It's around the deliveries. It's still not canceled. It's delayed. It's a project that has been contracted. It's not canceled, but delayed. In Q3, there was a delivery to a TV format, Life & Beth Season 2, and there was one movie title delivered. It was titled Flora and Son. It was in the box office briefly, and then it was aired on Apple TV+.
The airing was done already in September. That was applied to the theaters and Apple TV+. There was one documentary delivery titled Superpower. It's on Zelensky, directed by Sean Penn. It was delivered to Paramount+. In Q4, what is our outlook or guidance for Q4? The Screen Actors Guild strike is still an ongoing thing, but we are cautiously optimistic even despite the ongoing strike. I cautiously believe that the strike could be over even this week. That's a possibility. It could be over this week. As to the details, delivery dates, we would see more clearly once the Screen Actors Guild strike is over. If you look at our revenue structure, of course, delivery to TV takes up the majority of our revenue structure, but we have successfully diversified delivery efforts.
We have our documentary business plus the pictures business, and we have strategically invested in studios outside the U.S. There are some studios that we own that do production outside the U.S. With that, it's not really influenced by the U.S. SAG strike. We work with our own titles, plus we get titles from third party and engage in a distribution business with the supply titles. With this diversification, I think we are okay. As of today, I cannot give you a more detailed guidance number for Q4, but the improvement that you have witnessed in Q3 is not a one-off thing.
I have a cautiously optimistic view on the outlook for Q4, and I do believe that it will continue into next year as well. Of course, on a monthly basis, there will be some ups and downs when it comes to delivered title numbers. The titles that were contracted have not been canceled. The contract remains alive. It's just a delaying of the delivery date. With that, I would once again reiterate my cautious optimism for 2024.
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[Non-English content] The following question is by Kim Dong -jun from CLSA. Please go ahead.
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I have two questions. The first question goes to TVING. It's on your content investment for next year and in the coming two, three years. Would you take a more conservative stance or would you increase your investment in content? That was my question to TVING. My second question goes to Studio Dragon. Your results in Q3, it's quite optimistic, but I do believe the numbers include the results for The Big Door Prize 2. My question is, does your numbers include and already reflect what would be delivered in Q4?
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Now on our investment outlook. This year we spent more or less what we have spent last year, and we do believe that we will be spending more or less a similar amount going into next year. And you've asked about our two to three years investment outlook. With accelerated turnaround, there will be more need for quality content.
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The numbers that we have presented today does include some episode delivery on The Big Door Prize Season 2 and also Sweet Home Season 2. But it's not a full reflection of the series. The reflected episode, it numbers less than five.
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[Non-English content] Currently there are no participants with questions. Please press asterisk one to give your questions. [Non-English content] The following question is by Lee Ki-hoon from Hana Asset Management.
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I have two questions. First is on labor. I see that your results were pretty much helped by the decrease in labor cost. I see a decrease by approximately KRW 30 billion. Is it a decrease due to an actual headcount decrease, or is it because of the non-incentive payment? Would this continue going into the future? This is my first question. My second question is on your restructuring. You have sold your stake at BELIFT LAB, and there are talks in the market that you'll be working on your Netmarble stakes. But even if you sell these stakeholdings, I don't think it would be enough to cover your interest spending. Do you have any other measures that you're thinking of?
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First, on the labor cost question. I'll give you the headcount as of March -end year 2023, and also the numbers for end of September. At the end of March this year, there were 2,200 people working in entertainment. The number decreased to 1,990 people at the end of September. That's roughly about 10% headcount decrease. On the incentive non-payment question, there will be slight adjustments by the end of this year when it comes to our incentives.
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Yes. Now on to your second question. Yes, we did divest of our BELIFT LAB, and the process is complete now. We fetched about KRW 150 billion with the sale, leading to a lower leverage ratio. But that was not for the improvement of our financial, it was more to do with our business strategy. And as was communicated to the market, we are working on divesting non-core assets, and we are ready to divest of any non-core assets. But as to specific names, please understand that I am not at liberty to discuss on any specific names.
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[Non-English content] The following question is by Choi Yong-hyun from KB Securities. Please go ahead.
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I've got two questions for TVING. The first is to do with your Naver bundle offering. Because you have this bundle offering with Naver, I don't think the introduction of AVOD would lead to an added merit. I would like to hear your opinion on that. With AVOD, what is your expected penetration?
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It's true that we do have a lot of lighter payment scheme customers with our bundled offering, leading to lower ARPU numbers. But as was mentioned in the presentation and in my previous answers, we are awaiting a transition to AVOD scheme. And with that, our expected penetration rate stands at somewhere around 40%- 50%.
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My next question is related to your telco bundles offerings. Would you be introducing AVOD to those types of bundles offerings ars well?
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For the lower price tier, we are going to introduce the AVOD models. For the higher price standard and premium, it won't be with any ads.
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As there are no further questions, we will be ending the Q3 earnings release by CJ ENM. Thank you.