Good afternoon. This is Kay Choi of CJ ENM's IR team. I deeply thank the shareholders and analysts for taking time out of your busy schedule to attend our earning session.
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We will now begin the 2023 Q2 earning 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.
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Today, we have with us CFO Deuks oo Hwang and heads of different business divisions, including Mr. Ki Sung Hong from Media Platform, Chang-gun Koo from Film and Drama, Kyung- Joon Oh from Music, and Seo Jin-wook from Commerce. From Studio Dragon, we have Sung Ho Jang, and from TVING, we have CEO Choi Ju-hui. From Global Business, we have Steve Chung, and from CJ ENM Studios, we have Yoon Sang-hyun , and also we have our CSO Yoon Hong Kim with us.
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First, CFO Deuks oo Hwang will brief you on our midterm business strategies.
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Good afternoon. This is CFO Deuks oo Hwang from CJ ENM. Despite the sluggish market conditions and tougher competition in the first half, CJ ENM enhanced its core business competitiveness. The numbers were lower than market expectations, and there were highlights and lowlights from different business units. But the company enhanced its content competitiveness in the global market and fortified competency as a platform business, beginning our leap towards being a global IP powerhouse.
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CJ ENM greatly enhanced its content influence in the global market in the first half. TV ad sales decrease was inevitable with slow domestic ad market, but the company recorded global OTT viewing rates of 28.8%, and our overseas content sales increased 30.8% YoY, continuing our content IP power enhancement. With our content library, paying TV subscribers increased 69.2%. Overseas sales contributed to 39.3% of the music business sales, with continued growth momentum.
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The business environment seems to have passed the trough. CJ ENM is pulling all its efforts to realize a more meaningful growth in the second half and year 2024. We are optimizing content investment and enhancing platform competitiveness of TVING through diversification of business models. Studio production synergy will be strengthened with higher hit ratio and more sophisticated process in place.
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Pictures business concentrates on select and focus strategy and is waiting OTT optimized model. Music business will expand global human IP, including ZEROBASEONE and I-LAND II. With more advanced fandom platform, the business will continue its growth in the global market. FIFTH SEASON will enhance its production and distribution fundamentals despite the issues in the U.S. territory to focus on profit structure improvement and a turnaround. Commerce business will focus on profitability through expansion of one platform strategy. The company will further improve financial stability through cash flow improvement and asset securitization.
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I deeply thank our shareholders and analysts for your continued support, and CJ ENM, as a representative domestic content company and as a growing global player, will enhance our results going forward. Thank you
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Thank you. Next is our results presentation. CJ ENM's quarterly and yearly results are based on K-IFRS combined environment. Yearly comparison is on a pro forma basis, and internal transaction numbers have not been eliminated from different businesses' operating results. Now we will hear the company management results for Q2 2023.
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Good afternoon. This is Sang Mook Hwang from CJ ENM Finance. Consolidated revenue in Q2 decreased 12% YoY at KRW 1.489 trillion with an operating loss of KRW 30.4 billion. Entertainment recorded revenue of KRW 703.1 billion and operating loss of KRW 49.1 billion. With decrease of loss from FIFTH SEASON and with cost efficiency efforts of channel business, the business decreased the level of loss compared to the previous quarter. Commerce revenue stood at KRW 345.7 billion with operating profit of KRW 18.7 billion. The business showed improved profitability than the previous quarter with higher profit portfolio programming.
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Content investment efficiency measures will continue in the second half, and the company will focus on profit improvement with expanded global distribution. Content results will be maximized with platform-integrated operations strategy between channels and TVING. Production cost rationalization will be enhanced. Please refer to the material for detailed information. This concludes the presentation.
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We will continue with the presentation from Studio Dragon.
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Yes, good afternoon. This is CFO Sung Ho Jang from Studio Dragon. I will brief you on our management results for Q2 2023. Revenue for Q2 rose 3.8% YoY at KRW 163.5 billion. Studio Dragon continued its growth with global OTT-bound originals and sophisticated new titles overseas sales strategies. Despite the sluggish industry trends and the decrease in air titles, we were able to achieve this result. Our operating profit recorded KRW 16.3 billion. Even with the high baseline effect that came from last year's one-off library sales, the company proved its capability to generate profit with higher new title ASPs.
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Studio Dragon will focus on mid to long-term content strategy to preemptively address changes in the media environment and complete our global studio model. We will present a portfolio blueprint that tailors to the global drama market with tentpole titles including Doona!, Gyeongseong Creature, The Uncanny Counter 2, and Sweet Home 2, and with quality season [inaudible] presenting a content production system. The company will focus on profitability improvement with quality individual IPs and higher hit ratio to prepare for a bigger leap towards being a global studio. Thank you.
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Now we will be entertaining your questions. In consideration of time, please keep or limit your questions to three each, centering around core issues.
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Now Q&A session will begin. Please press star one, that is star and one, if you have any questions. For cancellation, please press star two, that is star and two on your phone.
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The first question will be given by Minha Choi of Samsung Securities. Please go ahead, ma'am.
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I will give you the translation to the three questions. All of the questions are addressed to CJ ENM. The first is on the TV ad sales. I've seen slight improvement in your Q2 numbers. It's because of the seasonality. Q2 seems to have been a higher season, but we do expect to see a lower season in Q3. What is your outlook or forecast for the overall TV ad sales market in the second half? This is the first question.
The second question is related to your FIFTH SEASON business. It seems that the loss has somewhat decreased, but could you please give us more color on it, maybe perhaps in the format of numbers? Could we also get your number-wise results for TVING as well? The third question is also related to FIFTH SEASON . It was guided that the number of titles to be delivered by FIFTH SEASON for this year as a whole was somewhere between 24- 28 titles, and I believe three titles have been delivered in the first half. If possible, could you give us a breakdown of how many titles will be delivered for different quarters? And if that's possible, could you give us a guideline as to how many new titles could be delivered in the second half?
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The first question will be addressed by Mr. Ki Sung Hong from Media Platform, and the FIFTH SEASON question, the third question actually, will be addressed by Ms. Calabrese from FIFTH SEASON .
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On the ad market for year 2023 as a whole, it's true that in general, the third quarters are lower season for ad market. And on a YoY basis, as you've mentioned, we've seen a slight improvement in the second quarter.
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I cannot give you a concrete expectation or forecast when it comes to the domestic ad market, but I believe that there are many companies that are readying themselves with new campaigns that are tickets to score. This fact has been told by many ad agencies as well. I cautiously look forward to a better fourth quarter.
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The revenue for TVING was at KRW 76.7 billion with an operating loss of KRW 47.9 billion. The numbers for FIFTH SEASON were KRW 76.3 billion with an operating loss of KRW 32.6 billion.
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Ms. Calabrese, I will be hearing your answer now.
Actually, Kasee having some audio difficulties. This is Steve Chung, Head of Global Division for CJ ENM, and I will answer this question.
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In terms of guidance for the number of titles for the second half of this year, as you may know, we are actually under a historical time in that we have two labor unions on strike, the writers union and the actors union. This is the first time in 60 years that the two unions are striking at the same time. Our company hopes that we will resolve this quickly with a positive outcome for all parties involved.
At this time, given that the two labor unions are concurrently on strike, it is difficult to guide how many titles will actually be delivered, because many of them still need to be finished in terms of its complete production for delivery. At this time, it's very difficult to give guidance on the actual numbers that we will be able to deliver. As you know, and as you alluded to in your question, the majority of the titles were scheduled to be delivered in Q3 and Q4 this year. As soon as we get clarity on the situation, we'll be able to let the guide to what the final number will be. At this time, that will be difficult to do. Thank you.
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The following question is by H.J. Kim of Daishin Securities. Please go ahead, sir.
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In your presentation, you alluded to fundamentally strengthening production and distribution business at FIFTH SEASON . Could you provide us with more color on what you're about to embark on? This was my question relating to FIFTH SEASON . My next question goes to Studio Dragon. We've heard that you've entered into new agreements with global OTTs on more favorable terms and conditions. With that, when will we see a significant improvement in your margins? Could you please provide us with an update on your upcoming projects? My last question, the third question, is related to BELIFT LAB, the divestment of it, and what form will it take going forward with the divestment or the sale?
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I'm not sure if I understood exactly the question, but I think as I understand it, the question is, in our earlier comments, we talked about strengthening the production and the fundamentals of the business and what we will do in the second half. If that's indeed the question, I think there are a few things that we are doing. Obviously, number one, from an interest rate perspective on the macro situation, we are making sure that any new projects that we undertake have a profit margin that we believe will be sustainable.
And so in every aspect of our operation, we are taking into account all the different factors that contribute to profit margins of our projects. That's one from a financial perspective. Secondly, while the strikes are going on, we are making sure that our team continues to focus on making progress with development both at studios and at networks to continue to further the projects that we have in the pipeline. And so with each of those efforts, when the strikes are over, we believe that we will be in a position to take advantage of the situation and emerge stronger once the strikes are over.
There are a lot of other efforts underway to make sure that we are looking at every expense while the strikes especially are underway, and to make sure that we have fiscal discipline in terms of managing our cost basis. Those are some of the efforts that we are undertaking now, but in terms of, as I said in my previous answer, because it is unknown when the strikes will end, it's very difficult to give any guidance financially on the outcome of what we expect the second half to be. And when that changes, obviously we'll hopefully be able to share more with everybody. Thank you.
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Now on the new favorable terms and conditions with global OTTs with Studio Dragon. That new more favorable terms and conditions will apply from [February 1, 2023] for the prebuys. Despite a rather slow domestic [inaudible] Q2 numbers proved steady. For the originals, the new terms and conditions will be applied starting in 2024.
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On our global project, there is the mentioned writers and actors strike in the U.S. market, but that had little influence on our business. The Big Door Prize Season 2 has completed crank up, and now we are working on the details.
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On our planning and production, "Crash Landing on Love" and [Developers World] are titles that have been written by Korean writers, so the U.S. strike had little influence on these projects. With the situation in the U.S. market, I think it's an opportunity for us to increase the presence of Korean content there.
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As for business in Japan, the actors have finished reading together the script, and production will begin in August, and it's slated for release in 2024. The project will be simultaneously released through local channels and global OTT.
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This is Kyung-Joon Oh from Music Business addressing your question. As you know, we've made a decision with BELIFT LAB. It was to enhance our IP related to our artists. As you're well aware, Mnet has its planning capacity and all the capacity when it comes to live concerts and HYBE excels in production. Our work together has led to the birth of Enhypen, and that was a great result for both parties, and it was a good chance to learn from each other and also to cooperate based on each other's merit.
With this collaboration, we have seen Boys Planet do well as the teaser release for I-LAND 2 in July. The production of it was done by a star producer called Teddy. All these efforts have been in place to enhance our in-house IP. We've had in-depth discussions with HYBE and our needs actually clicked together in making this ultimate decision. So we're going to focus on enhancing our artist IP plus the various IPs held by Mnet.
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The next question is from Eun Jung Shin of DB Financial Investment. Please go ahead, ma'am.
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The first question is for TVING. There have been many press reports about a possible merger with Wavve. Will that be likely possibility? And do you have any thoughts on that? This is my first question. My second question also gone to TVING. You talked about diversifying profit and what kind of model are you going to pursue in diversifying your profit sources? And now the third question is on divestment of the non-core assets, especially that Netmarble stakeholding. What is plan with your stakeholding in Netmarble? Will there be actually a sales of your stakeholding?
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It's true that there have been various reports on the possibility of a merger between TVING and Wavve. The competition in the OTT market, as you well know, is very fierce, and especially the competition is really fierce with the global OTT players. It's also true that the domestic OTT companies have some improvement when it comes to their profitability. The market condition is not that favorable. Having said that, as was mentioned in the presentation, the paying subscribers for TVING grew 70% on a YoY basis. We did talk about a little more diversification in our profit model.
With more diversity in our profit model, we will be seeking top-line growth. We will be working with original content and TV content, and also we will be working on adding more sophistication to our services. With content improvement and better services, we will be enhancing the competitiveness of TVING as a whole. With the given market situation and the environment, a possible merger would be a difficult thing to actually implement. We are not, at this given point in time, actively considering it a possibility. We will, as was mentioned, be working with our content and service sophistication in the second half.
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This is CEO Choi Ju-hui addressing your diversification related question. We will be working on enhancing the number of paying subscribers and also the subscription model. As you're well aware and as we have discussed, we will be working together with the channel to enhance synergy, and we will be working on IP-based content, and we will also be intensifying our digital marketing activities. With that, we hope to provide and improve the service as well when it comes to more personalized curation and search and easier to use UI and UX. This being implemented will add to our platform competitiveness. Other than the simple subscription model, we could also work with ad watch models, and we could also introduce new pricing zones for diversity.
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On your divestment question, we have been making efforts to divest and securitize our non-operating non-core assets. We are currently looking into various possibilities, and we do understand that the market has some concerns over our financial stability. It's true that we have to unwind some of our asset holdings. Having said that, we also have to pay attention to the given market conditions to maximize our divestment results.
In the first half, we looked at the various possibilities, and we sold off our stakeholdings in Samsung Life and LG HelloVision. Although it was not a big amount, this is the executed divestment effort, and we are currently studying other ways to give you a more meaningful result in the second half. There will be tangible results, hopefully in the second half. As to the actual holdings of specific companies, please understand that we are not at liberty to disclose such information.
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The following question will be given by Hyeon-ji Lee of Eugene Investment & Securities. Please go ahead, ma'am.
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I have three questions. First is also to FIFTH SEASON . I believe that you have delivered three titles in this quarter, and even with the three titles being delivered led to the loss numbers that you have reported today. This means you must have quite a hefty fixed cost. My calculation gives about KRW 35 billion. Could you please elaborate on that? My second question is to TVING.
You did mention that the number of paying subscribers has grown significantly, but compared to your Q1 numbers, the loss has deepened. Is it because of amortization reasons or is it because of your ASP? I would like to hear more color on that. My third question is on your divestment and digitization efforts. Once again, what is the level of borrowing that the company has and what is the level of cash to service that borrowing?
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Thank you for the question. I think two parts to it. First of all, on the revenue for second quarter, we had some titles that were originally slated for delivery and also revenue generation in Q2. But we had decided based on the market conditions, especially in the film and documentary titles, that it would be more beneficial to wait to be able to sell or license those titles. So the two key numbers sort of reflect that today.
But to the second part of the question of in terms of our expenses and fixed costs, as I said in my previous answer, we are working very closely with the FIFTH SEASON management team to look at all expense line items and to make adjustments as necessary and closely monitoring the situation of the strikes so that the business can be nimble and at the appropriate expense levels to deliver on to our financial goals and our business performance. So those activities are undergoing actively to look at every expense line item to make sure that we remain fiscally responsible and disciplined.
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It's true that our loss has somewhat increased in the second quarter. It's because we have big title originals, including I-LAND 2 and Duty After School that was shown in the first half. The amortization of these IPs coincided in the second quarter. With that, our loss numbers have somewhat widened. It's not because of a lower ARPU that we have seen an increase in our loss numbers. It's just because of the coinciding amortization period. But going forward from the second half, we will be allocating or releasing the original titles in a more timely fashion. With that, our numbers will most likely see an improvement. We will also be looking to co-production opportunities with drama channels in order to enhance the profitability.
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If I may add to the amortization related question about the amortization of our intangible assets. If you look at our costs, if you refer to the materials that we have distributed, our cost as a 8.9%, that's a significant decrease on a YoY basis. Our amortization cost was at KRW 205.7 billion at a rate of 30%. Last year, that same number was over 40%. It means we have seen much improvement when it comes to efficiency and programming. As was mentioned in the previous answer, there was an overlap of amortization periods for the two large tentpole titles. Once again, it would be more evenly spread out going forward.
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Now on the borrowings question, your third question. As of end of June, on a consolidated basis, our total borrowings stand at KRW 3.4 trillion, with KRW 1.6 trillion being short-term borrowings. That's about 48%. Our cash on a consolidated basis stands at KRW 900 billion. So that leaves our net borrowing at KRW 2.5 trillion. As was mentioned, we will be engaging in earnout securitization efforts in the second half and we will be servicing back our borrowings through our securitization efforts.
The efforts will mostly focus on the short-term borrowings. Should we not be able to service the maturing debt, we would have no issue with refinancing our short-term borrowings because the short-term borrowings lie mostly with ENM or Studio Dragon or overseas subsidiaries that were guaranteed by ENM. So we have no issues refinancing them.
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Next question is from Yongh yun Choi of KB Securities. Please go ahead, sir.
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I have two questions. First was to TVING. As of today, you are the number two platform. And what is your thinking on raising your ads and perhaps a possible attrition? My second question goes to FIFTH SEASON . There have been reports of FIFTH SEASON receiving equity investment. What is the progress to date?
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With increasing ARPU, could there be some attrition of our subscribers? It's natural that you consider this, but we have weighed the risks and the benefits. Our conclusion is that the benefits far outweigh the associated risk. Because we have seen proven loyalty and stickiness with our subscribers. With strong content provided by C.J., we have witnessed a strong loyalty and stickiness of our subscribers. We would also be actively engaging in marketing activities, including promotions and marketing. With that, we have safely concluded that the benefits associated with our increase in ARPU far outweigh the risk.
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Now, once again, back to FIFTH SEASON . It's true that the business is in a difficult environment, but I do not foresee any operational cash flow related issues with that business. It's true that the business is looking for ways to realize a turnaround. At this given point in time, I cannot give you any comments on the mentioned external equity investment.
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Since there are no further questions, we will conclude Q2 2023 earnings release session from CJ ENM. Thank you.