Good afternoon. This is Kay Choi from CJ ENM IR. I thank the shareholders and analysts for taking time out of their busy schedules to attend our earnings release session.
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We will now begin the earnings presentation of CJ ENM for Q1 2023. Please note that the financial and management results have yet to undergo an independent auditor's review and could be subject to changes upon that review.
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Here today with us, we have our CFO, Deuksoo Hwang, and heads of different business divisions.
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We have CFO Deuksoo Hwang with us, [inaudible] CSO Yoon Kim, and Ki Sung Hong from Media Platform. From Pictures and Drama, we have Ko Kyung-beom . From Music, we have Shim Jun-beom , and from Commerce, we have Seo Jin-wook . We also have heads or CEOs from our subsidiaries, including Ms. Kim Jey-hyun from Studio Dragon, Yang Ji-eul from TVING, and Yong Soo Ha from CJ ENM Studios. We also have Steve Chung, who heads the global business.
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First, we will be hearing from CFO Deuksoo Hwang on our reorganization.
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Good afternoon once again. This is CFO Deuksoo Hwang. CJ ENM underwent a business unit restructuring process in January to give more business responsibility to clear business units and also set up a cooperative process that would strengthen synergy between different business units and our subsidiaries. In line with this restructuring, our business-wise profit and loss classification has been changed from the previous media, pictures, music, and commerce to media platform, pictures and drama, music, and commerce to give more clarity to our profit numbers.
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Media platform includes TV channels and OTT platforms that deliver our content to the customers, and also TV ads, subscription, and TVING businesses. The company is going to enhance platform competitiveness by increasing synergy between linear channels and OTTs.
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Pictures and Drama is comprised of diverse content production, pictures, performance, and content distribution business through our multi studios. This multi-studio system will fortify our content competitiveness and enhance cooperation through joint planning and production, allowing global distribution of content.
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As for music, Mnet related business numbers that were previously included in the media business were brought in to show the entirety of the business. Commerce remains the same, with sales classification for TV commerce and digital commerce.
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The economy slowdown that began in the second half of last year continues to decrease the ad market and dampen consumption. With that, the business is facing a very difficult environment, as is illustrated by the slower growth in OTT subscription. However, through our organization reshuffle, CJ ENM will add efficiency and productivity to our business and is doing our best to restore our competitiveness. The overlaps in organization operation has been reorganized centering on core R&R, and we are focusing on our business competencies. We will address the fast changing market conditions and expand domestic and international results. Thank you.
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Next is the results presentation. The quarterly and yearly results presented by CJ ENM are based on K-IFRS and on a consolidated basis. YoY comparisons are given on a Proforma basis. The business division-wide operating numbers have not eliminated internal transaction numbers. Now we will hear the management result presentation of the company for Q1 2023.
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Good afternoon. This is Sang Mook Hwang from Finance. Consolidated revenue in Q1 recorded KRW 949.0 billion, which is a 0.9% decrease YoY with operating loss of KRW 50.3 billion. Entertainment recorded revenue of KRW 632.9 billion with operating loss of KRW 67.8 billion. Commerce recorded revenue of KRW 316.1 billion with operating profit of KRW 17.5 billion. The operating number decrease from entertainment was mainly due to sluggish TV ad business and Fifth Season delivery absence and increase in production. Commerce showed improved profitability with high profit portfolio programming.
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The business will strengthen distribution in Q2 centering on premium content and focus on profitability recovery in Commerce portfolio strategy that centers on mega brands. Efforts will increase in TV ads and expand TV subscriber base. International drama distribution will be enhanced with Tale of the Nine Tailed 1938 and Family. The company will increase delivery to Fifth Season. DXTEEN will be making their debut and our in-house artists including JO1 and INI will increase activities and concerts continuing their growth. Based on one platform strategy, Commerce will enhance programming of high profit products to restore profitability. Please refer to the document for details of different businesses.
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Good afternoon. This is CEO Kim Jey-hyun of Studio Dragon. I will brief you on the Q1 management results. 2023 Q1 revenue increased by 74.4% at KRW 211.1 billion. With increase in simultaneously aired titles and OTT Originals, sales revenue grew 113% YoY continuing our fast growth. Our operating profit recorded KRW 21.6 billion with sales to Netflix and Disney+ and also with added efficiency to regional sales.
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In particular, our content recorded 33.2% of watch time for non-English TV series on Netflix. Our first local US drama, The Big Door Prize, was launched successfully, and the confirmation of season two is an encouraging result. The company has around 20 projects in queue, including Hotel del Luna, Crash Landing on You, The Plotters and Mastermind. We will be delivering tangible results throughout the year.
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Starting from Q2, we will further enhance our growth potential by bringing in marketing for our production process. Tale of the Nine Tailed 1938 will be aired simultaneously on Amazon and tvN, and the company will enhance the hit ratio of our titles by engaging in marketing activities together with these platforms from the planning stage onwards. Encouraging results with new platforms will lead to enhanced partnership and sales of new and library titles, which in turn will improve productivity and profitability, leading to a virtuous cycle. Thank you.
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Now we will be entertaining your questions.
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Now Q&A session will begin. Please press star one, star and one if you have any questions. For translation, please press star two, that is star and two on your phone.
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Currently there is no participant with questions. Please press star one, star and one to give your question.
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The first question will be given by Ms. Kim So-hye of Hanwha Investment & Securities. Please go ahead.
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I have one question. The company has been communicating about the cost control and also organization reshuffles. When will we see the actual results coming from these efforts?
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It's true that the company has been engaging in reshuffling measures since the beginning of last year, end of last year, and that we also underwent a restructuring. It was to eliminate any inefficiencies and to streamline our decision making process. It was a process to add efficiency to our decision making. In the wake of that, we had to do some restructuring as well. The focus was not on short term cost cutting measures, but a longer term business efficiency enhancement. Through all these activities, we wanted to enhance our overall performance. As was mentioned during the presentation, with the economy slowdown, we are making added efforts to decrease our cost. I believe that there could be some tangible results out in the second half of this year.
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The following question is by Ms. Shin Eun-jung of DB Financial Investment. Please go ahead, ma'am.
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I have a question for CJ ENM and a question for Studio Dragon. The first question that goes to CJ ENM is as follows. Could you please give us more detailed loss numbers regarding your business Fifth Season and TVING? Could you also tell us about the subscriber growth trend of TVING? I would like to see some more color on your Q2 delivery to Fifth Season. Are there any fixed titles about Q2? You've guided about 24 to 28 titles on a yearly basis, but do you still stick to your original position of 28 titles? My next question goes to Studio Dragon. The revenue numbers we were briefed on — the operating margin or the operating profit does not really match the growth in your top line. Could you please tell us why?
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The first question on the loss associated with Fifth Season and TVING. Coincidentally, the number is quite similar at KRW -40 billion for Q1. The loss has seen an increase on a YoY basis.
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This is CEO of TVING. Addressing your question. We do not disclose the actual subscriber numbers, but I could give you the growth trend. Q1 subscriber growth rate on a YoY basis grew by 65.2%. On a QoQ basis, it was a growth of 4.4%. There are two reasons behind it. First is the illegal streaming sites, and second will be because of our content. Let me give you more color on our loss amounting to KRW 40 billion. Our key content was concentrated in Q1. Duty After School began airing on March 31st. The cost has been reflected, so it's leading to our loss numbers.
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We will now give you the answer from Studio Dragon, followed with the answer on Fifth Season.
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In Q2, there was heavy sales, first window sales concentration in Q1. Also, if I may talk about last year's Q1, there was a heavy library contract with new platforms in Q1. the library sales is well dispersed throughout all the quarters. So things are back to normal. With that, we will be seeing an average of OP margin around 10%.
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Yes, this is Steve Chung, heading the global business. For accuracy's sake, I will deliver my answer in English.
I think there were two questions. One was our expectations for Q2 delivery, and also what our remaining forecast is for number of titles delivered for this year. On the first part, for Q2, we do expect to be delivering one TV series, three film titles, and numerous documentary outputs. That will round up Q2 expected delivery. In terms of the full year delivery titles, we remain unchanged in our expectations to deliver 24 to 28 titles as you had cited. Thank you.
The next question will be given by Mr. Yonghyun Choi of KB Securities. Please go ahead, sir.
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I have three questions for CJ ENM. First is on your investment. If your investment is to be on par with what you invested last year, I believe the company will require borrowing to receive investment. How are you balancing your growth and business efficiency? This is the first question. My second question goes to TVING. If you were to invest the same amount that you did in the year 2022, I think you would need more capital injection, or you would have to also resort to borrowings. What is your funding plan? This question is for TVING. My third question is related to asset securitization. There are investments to secure holdings and also with real estate. Is there a possibility that you even think of selling some of your business units?
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Excluding Fifth Season, the production cost for CJ ENM and our subsidiaries that we could indicate last year was KRW 860 billion. This is for our own content, not for external sales. For CJ ENM, the cost stands at KRW 740 billion. This is excluding what we require from TVING originals. KRW 600 billion was budgeted and on top of that, KRW 140 billion goes for TVING. With these numbers, I can say that it's a slight increase for the production cost that we saw last year. As was mentioned during the presentation, we are working on it to add more efficiency and to eliminate any redundancies when it comes to cost.
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As mentioned in the previous answer, we will be spending to create originals for TVING, and the budget remains more or less the same as what we have executed in 2022. We are seeing our subscriber bases increase and also our revenue numbers increase. As was mentioned before, our 2024 content will first go throughout the remaining quarters. We are going to see some improvement in our numbers in Q2 to Q4. With that, we would be requiring no additional external funding. We could fuel our user cash we generate.
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Now on your third question, which was on asset securitization. Yes, it did execute a big scale investment back in 2022, leading to added burden on our financials. And as was mentioned in February, we did come up with a list of investment assets that could be up for sale. They are, of course, non-core assets not related to our direct business. Three months have passed since February, and we implemented some of the quicker ones. Most of the listed up divestment plans need a counterparty. We are currently reviewing the various possibilities and we are preparing to execute these deals. As for the last part of your question, do we have any plan to sell off our business units or divisions? The answer is no.
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The next question will be given by Ms. Lee Hwa-jeong of NH Investment & Securities. Please go ahead, ma'am.
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My first question is on your TV Wednesdays and Thursdays slots. You've discontinued it, and what kind of business will you have on CJ ENM and Studio Dragon? This is my first question. My second question goes to Fifth Season and it's a follow-up question with your previous one. You've mentioned delivery of 24 to 28 titles in 2023. Could you please give us the percentage breakdown for dramas, films, and documentaries? My last question goes to TVING. We are seeing the increase of production cost and with that, we do see an increase in your loss numbers as well. Are you going to stick to your more expensive content strategy, or will you be changing directions?
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Yes, let me address the first question, which is on the discontinuation of Wednesday, Thursday drama block. This is not a discontinuation, but adding more flexibility to our strategy. Instead of having dramas for the Wednesday, Thursday blocks, we are going to have non-script formats and also successful TV original content to be aired on Wednesdays and Thursdays. The influence to CJ ENM would be associated with smaller production costs compared to the drama format. As for Studio Dragon, the titles that they supply to us could see somewhat of a decrease, but since Studio Dragon has such a healthy third party clientele, I don't think it will really be influencing them.
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Yes, this is follow through. Given the team of Studio Dragon, we've given out the guidance for the number of titles that we are going to supply, and it had already taken into consideration the discontinuation of the Wednesday and Thursday block. So our stance remains the same. And as was mentioned by Mr. Hong, we are going to also focus on hybrid distribution, and we would also be working on developing newer platforms too.
[Non-English content] I'll say in English on this one as well. The question was of the 24 to 28 title guidance, what's the breakdown between the TV series, the films, and doc? Before I answer that, I think it's important to know, obviously, traditionally Fifth Season has been strongest and with roots in TV dramas and TV series. That's been the historical strength of the company, and it will be such as well in 2023. That said, there are many ways to understand the distribution of the titles.
From a pure numerical perspective, I'm a little hesitant to give exact numbers, but roughly speaking, dramas by number of titles would be less than, for example, documentaries. Because the average budget and revenue of the TV series is orders of magnitude greater than the typical documentary. While there are fewer numbers of titles from a proportion of importance in terms of revenue, the TV series slate is probably of the most importance. That's one way to answer your question to give you a better idea of the importance of the title and the distribution between film documentary versus television.
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CEO Yang from TVING speaking. We think of our content investment as a portfolio investment. Within the portfolio, we have 10 poll titles and also titles that are associated with a smaller budget, but value for money. We try to optimize the mix that is delivered to our diverse mix. In your question, you said there could be an increase in our loss, but with the strengthening of our subscriber bases and with the same amount of investment going in for our titles, we believe the profitability of our business will improve going forward. As was mentioned by Mr. Hong from Media Platform, we will be enjoying more synergy with TVING as well.
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The following question is from Mr. Kim Dong Jun of CLSA. Please go ahead, sir.
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We've been seeing some negative news coverage when it comes to Studio Dragon recently while the OTT and TV businesses are not as they used to be. Realistically speaking, how much of a growth do you expect in the number of titles that you can deliver? Could you give us guidance on that? You're working with Netflix, Disney+, Amazon, TVING, and your growth seems tied to these different OTTs. We've even heard that Netflix is quite limited in their expansion activities. If you could give us some more guidance on these issues, it would be much appreciated.
On Netflix, once again, your new contract with Netflix — the market seems to have some misunderstanding of it, or it seems to have a different understanding. Could you give us further information on what kind of margin upside you can enjoy with the new terms and conditions with Netflix? When will these new terms and conditions be applied, and since when? Congratulations on the confirmed Season 2 of Big Door Prize. When will it be reflected in your revenue numbers, your sales first? Back to your overseas drama production — when can we see a meaningful, steady title production from your overseas activities? By when?
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I do understand the concerns and expectations for your Q2 and TV market. When it comes to Netflix, they have recently announced their continued investment and interest in K-drama. On top of that, we are seeing an increase in interest from new platform players such as Amazon and Apple that have yet to make big investments for Korean content. Going forward, we do expect to see diverse contracts from diverse platform players. As to the number of our titles, each title is now seeing a production cost increase. Rather than increasing the absolute number of titles, we will be working on improving the hit ratio and also the volume and margin associated with each different title. We hope to get the best contract with different platforms.
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On our new contract with Netflix, the general terms and conditions with the new contract is better than the previous one. There is a reflection of pre-buys too. When it comes to original, the revenue is recognized at the time of delivery. We will be seeing improvement in our numbers starting from next year when our delivery begins.
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On The Big Door Prize Season 2, we are currently working on the production of it, and at this given point in time, we do expect to see delivery happen at the end of year 2023, but we would have to update you on the exact schedule as things progress.
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As for a meaningful and steady number of titles to be created overseas, in particular the U.S., we do hope to see some tangible results this year, and after 2024, we do hope to see about two titles being created overseas.
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The next question is from Ms. Lee Hyun-ji from Eugene Investment & Securities . Please go ahead, ma'am.
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Three questions. First is on TV ads. I know that TV ad market is quite difficult to predict, but do you think you have bottomed out the TV ad market as of now in Q1? Or will Q2 be as difficult as Q1? And when do you expect to see a recovery of the TV ad market? This is the first question. My second question goes to TVING. I believe that we were given the guidance of 5 million subscribers for TVING. Do you still maintain your position? And my third question goes to Studio Dragon. I might have missed because of poor line connection. Your US drama. Did you say 20 titles? Because I thought it was going to be about 10 titles. Have you won any new contracts with the new platform? And you talked about seeing tangible results in your business market. Is it related to The Big Door Prize Season 2 or are you talking about a brand new title?
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This time I address your ads market question first. As you well heard, the TV ad market has seen a YoY -30% growth in Q1, and it's quite difficult to predict what will happen going into the future. Having said that, I do see that there will be some improvement in Q2 on a YoY basis. Our basis is the increase of advertisers in Q2 compared to Q1. We're seeing more advertisers come to the ad market. With that, I cautiously think that in the second half of this year, things will start to improve.
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This is from TVING. As you're well aware, the market is quite volatile. There are various challenges and also opportunities out there for us. We may not be reaching the 5 million subscriber basis that was mentioned. There is a big possibility of that. We will be working on upgrading our existing subscriber basis because there is a massive need to have content on larger screen TVs, and also with higher resolution TVs. We are thinking of moving up the plan scheme for our existing subscribers.
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Yes, this is Studio Dragon. You heard the number correct. It's 20 IPs for the US drama market. They include Korean IP remakes in the US market and also Korean and US originals. We have plans to work on it alone. For some titles, we will be working together with a US company for development and production, too. The tangible results that I talked about for 2023 include the results from The Big Door Prize Season 2 and one new order that we're currently working on.