Kakao Games Corp. (A293490) Earnings Call Transcript & Summary

[Interpreted] Good morning. I'm Lily, Kakao Games -- from Kakao Games IR team. We will begin the third quarter 2024 earnings presentation. Today, I have with me our CEO, Michael; and CFO, [ Terry ]. We will start with the CFO's presentation on Q3 '24 earnings. As a disclaimer: Today's earnings release includes estimates of K-IFRS-based consolidated statements, which are subject to change upon the auditor's review. Additionally, to [ enhance ] comparability, the financial statement for the previous quarter and the same period of the prior year have been prepared in accordance with the current standard of the current period.

[Interpreted] Good morning. I'm [ Terry ], CFO of Kakao Games. I will, first, provide you with an update on changes to the accounting treatment for the third quarter. To focus company's resources to building new game lineup, we transferred 37.6% of Sena Technologies stake, out of 53.6% holding, as of end of Q3 because we felt that the synergies were not visible enough. As such, Sena technology has been deconsolidated. And as the business had impact, meaningful impact, on the revenue and operating profit of Kakao Games, we reclassified them [ in the P&L ] from discontinued operations in the financial statement. Regarding the sale of Kakao VX, no confirmed decision has been made yet, but as we decided to, first, withdraw from golf merchandise, [ health ] platform and golf-related NFT businesses, in step with the company's business rationalization efforts, these businesses are now captured under P&L from discontinued business as per the accounting standard. Now moving on to the financials of the third quarter of '24. Despite solid metrics driving top line revenue from core PC and mobile titles, on the back of downward stabilization of publishing titles that were released in the first half [ and ] absence of new titles, Q3 consolidated revenue declined 14% year-over-year -- and up 5% Q-over-Q to KRW 193.9 billion. As the share of in-house-developed titles that have higher margin came down, operating profit fell 80% year-on-year to KRW 5.7 billion. Let's now take a look at Q3 revenue breakdown. For PC game, impact from extensive collaboration update continued from PUBG, driving PC game revenue up 196% year-over-year and 109% Q-on-Q, reporting KRW 34.2 billion. Ahead of expansion for PC and console platform services which will come under full swing next year, we are in the process of gearing up for domestic servicing of a -- globally acclaimed game titles, working in collaboration with global partners, in Q4. POE2, which is slated for early access release on 7th of next month, has received raving reviews on its demo version showcased during the gamescom event, cementing its top-tier positioning in the hack and slash segment. The game offers more than unique hack-and-slash action, adding to it more extravagant action and maximizing the enjoyment of game control. With the anticipation building up around the globe, domestic user interests are also spreading. And we are making thorough preparations to attract diversified user segment, including casual gamers, to drive outperformance versus the preceding titles. Development and polishing process for Chrono Odyssey and ArcheAge chronicle (sic) [ ArcheAge Chronicles ] have been kick-started under the goal of running CBT next year. Up until the CBT, we will release more information and videos about the game on periodic basis to gradually build upon the anticipation of the global market. In-game playing videos of ArcheAge chronicle were released during Sony's State of Play event in September, garnering great level of interest from the console users, especially on the graphic and universe and action element of the game. It was accompanied by a release of interview video with a developer giving a peek into the story and content inherited from the original title, which further stirred up excitement. For mobile games, while in-house-developed games like Odin and ArcheAge WAR generated steady performance, performance metric of third-party titles that we published trended down, driving mobile revenue down 31% year-on-year and 6% Q-over-Q to KRW 126.6 billion. Odin, in the domestic market, saw its metrics trend up across all user segment on persisting [ impact ] from 3-year anniversary update made at end of June. We have well-diversified user base and solid performance metrics, which is the key strength of Odin that enables the game to sustain its top line momentum over a longer-term horizon. In the fourth quarter, to expand user base who enjoy the content, we are going through revamping to configure content that's bespoke for each user segment. And we will adjust balance across classes to deliver a well-balanced play experience. We expect this will help us maintain the performance at Q3 levels. Following new service being opened in August, the -- and extensive update of ArcheAge WAR, [ domestic ] service saw a rebound in performance metrics. By delivering combative background that reinforces the fundamental joy of PVP rivalry and by supporting in-game convenience features, reflecting user feedback, we would be able to sustain the metrics and sales revenue at a steady state. For global servicing, our focus is on stable operations while swiftly carrying out update of core contents like siege warfare and server migration, which all work towards providing comfortable gaming environment for our user base. Most recently, competition among users have been heightened, with metrics trending upwards. We are actively incorporating feedback that we gained from user forums and are focused on driving performance underpinned by our hardcore user base. Other revenue saw 7% year-over-year growth following the launch of new product from screen golf business, but due to off-season impact from golf course operations during the summertime, other revenue was down 2% Q-over-Q, reporting KRW 33.1 billion. Next is operating expense. Q3 consolidated operating expense was down 5% year-over-year but up 1% Q-over-Q to KRW 188.2 billion. In terms of the breakdown, there were levers that drove labor costs up, like increase in the game lineup and head count investments made for expanding into PC and console segment, but supported by discipline on new hires and reallocation of roles and other efficiency gain efforts, labor cost was up 6% year-over-year and 3% Q-over-Q to KRW 45.3 billion. In the process of dealing with our noncore businesses and projects, we are continuously working on optimizing the company-wide labor cost structure, including subsidiaries, with the goal of maintaining labor cost at the third quarter level throughout the fourth quarter. Marketing spend increased 32% year-on-year and 48% Q-over-Q, reporting KRW 15.2 billion on the back of global expansion of mobile games and holding of PUBG PC game event. In the fourth quarter, strategic marketing campaigns for POE2 and upcoming new titles are planned. However, we will continue to focus on highly efficient marketing for legacy games, aiming to maintain the marketing-to-revenue ratio at the level of last year. Commission expense includes fees to marketplace and studios and usage fees for infrastructure. And with fluctuations in game revenue, it was down 12% year-on-year and 2% Q-on-Q to KRW 88.6 billion. Amortization expense decreased to KRW 13.7 billion, down 30% year-on-year and 3% Q-over-Q due to the reduction in intangible assets. Other expense, comprising of cost of sales of Kakao VX and other SG&A, was up 9% year-over-year following new product release last quarter, but due to reductions in SG&A, it decreased 11% Q-over-Q to KRW 25.4 billion. In Q3, Kakao Games was running its business under an emergency management, implementing measures to drive rebound in performance and improved financial position through securitization of assets and sale and withdrawal from noncore businesses. In the short run, tangible results may be limited, but we are focused on revamping business structure and performance leverage so that we can harness performance from upcoming AAA titles, using it as an opportunity to make a quantum jump come second half of next year. We are at a juncture going from [ mobile-centric ] business to global PC and console platform expansion, while we will focus our company-wide capacity around strengthening fundamental competitiveness. Thank you once again, to shareholders and analysts, for your continued interest and support. This ends the third quarter 2024 earnings report.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be presented by Hee-Seok Lim from Mirae Asset Securities.

[Interpreted] I have 2 questions. The first question is would like to gain some understanding as to the overall strategic direction that you have regarding the rationalization of the company's head count. And when will we start to see the impact from such effort? Second question is I see that you have quite a bit of a lineup of new titles that are upcoming. Out of those, can you provide us with some color on maybe 1 or 2 titles that the company is looking forward to?

[Interpreted] This is Michael. I will respond to your first question, with regards to the rationalization effects that is ongoing within the company vis-à-vis the noncore business areas. As our CFO has mentioned at very beginning, we have sold off certain stake that we were holding in Sena Technologies. And for Kakao VX there were head count related rationalization that was ongoing with regards to reallocation of the human resources as well as taking early retirement program. So all of these efforts are being focused so that we could focus our efforts as well as our resources into the future growth businesses. With regards to some of the keywords that I can maybe elaborate that will help us further fuel future growth, number one, we will be focusing on maximizing the performance from our global business; number two, expand PC and console platform; number three, diversify the game genre and the segment that we play in; number four, using AI technology in developing and servicing the game titles; and number five, upscaling the processes so that we can improve on customer engagement. So these 5 areas are some of the key strategic direction for the company. And one -- out of these efforts, basically, the global performance, expanding into PC and console platform as well as the diversification of the game segment, these 3 strategies will start to feed in. And you will be able to see its impact on these new game titles that would be introduced, starting next year. Also, responding to your second question on which of the game titles that are upcoming next year that we are really looking forward to, I have to say that we have quite a bit of new titles that's upcoming next year. And we are looking forward to all of those game titles that will be released, but I can respond to your question in 2 ways. The first one is with regards to strategies that I have mentioned, which is global, expansion into platform and diversification of the game segment. There is going to be many different, new titles that's coming up next year. And as we've done in the past, we will be quite aggressive in making that expansion forward. The new titles will include some of the PC and console mid-core titles from Ocean Drive. And these -- and there will be some other titles that would play as an important icon that could trigger future growth for us, so we are looking forward to a couple of new titles that are upcoming next year. You would also have interest as to what financial impact it will have. First, I've, we've already mentioned that there's going to be 2 AAA titles for PC and console platform. Mid-core, that is -- [Excuse me.] 2 AAA titles that are upcoming for PC and console platform. We are looking forward to that. And also, secondly, Lionheart is developing a mobile MMO game title. It's called a Project Q at this point. And that title is slated for release in the second half of 2025. So we believe that these 2 game titles will have quite a bit of significant contribution made to our financials.

[Interpreted] This is CFO [ Terry ]. I would just like to also add on top of what Michael has mentioned. As we are preparing for our 4 game titles that are upcoming, from a financial perspective, there will be focused investment into development and also use of the company resources, so inevitably, there's going to be increases in the expense and investment that we've made. However, this was already catered for in our initial year budget planning, so there's going to be some offset impact on our -- the company's and the subsidiaries' head count related rationalization process. And from that, we will be saving costs, but that will be offset with the investment and [ the spend that will be required ]. So there is plus-minus balance that we are very keen on striking, so in terms of the cost items like labor costs and outsourcing and partnership-related expenses, it will be maintained at the current level.

[Foreign Language] The following question will be presented by Seung Hoon Lee from IBK Investment Securities.

[Interpreted] Next year, we are looking forward to a couple of big AAA titles upcoming in the genre of MMORPG and RPG, but in the Western market, MMORPG games do not seem to succeed that well. What do you think is going to be the levers that will help you bring the release into a success? And second question is you're going to be publishing and releasing multiple game titles, but recently we've seen that the probability of success has been eroded. I would like to gain your insight as to how you assess the situation.

[Interpreted] Responding to your first question. I presume that you are mostly referring to the upcoming game titles of Chrono Odyssey and ArcheAge chronicle. And I think that those types of concerns are formed from limited information about the new titles that are under development. You are right that both titles were initially introduced as an MMORPG with the distinction of implementing action combat on MMO servers. Both titles are developed, however, with the global -- with the goal of reaching commercial success in the so-called growth RPG market, which is becoming a major genre in the global marketplace, with the broadest audience in the Western world. So the characteristics of MMORPG games, which is defined by RvRs and PVPs and war field battle and combat, it is quite different from what you see in growth RPG, so to this end, the large-scale battles such as sieges and PVP elements have been drastically removed. So both of these studios, XLGAMES and Chrono, they have solid experience in developing online RPGs. And they have been around since the early days of Korea's PC gaming industry. The game is centered on single-player content that allows players to experience the fun of combining various skills and combat actions based on a cohesive and immersive world setting. The game is being completed as a growth RPG, which is a mainstream game segment in the Western world that allows players to enjoy the fun of exploring new domains and adventuring through the freedom of play provided by the large open world and the puzzles and strategic combat elements that are scattered throughout the game. They also offer wealth of free-to-play non-combative content based on their long experience in running live services, and also offer a wide range of collaborative missions and PVP competitive content that can be enjoyed by parties or guilds as well as social play such as party-type dungeons and [ both ] monster encounters that requires strategic collaboration and team play. And Korean game studios are well known for their competitive edge when it comes to social play and live servicing, so utilizing such core experiences and capabilities gained in the Korean game market, we are striving to compete with the Western market which are formed and centered on single-player games by adding and bringing in additional fun and differentiation. And responding to your second question that I have to say is a quite difficult question to tackle because it's a challenge that is faced by all of the game companies within Korea. However, just to provide you with our perspective: Kakao Games is really good at successfully servicing live-serviced games. We have the know-how. And also we have the experience of building out and solidifying the basis of a specific game genre. And as you've seen from our past successes, especially in MMORPG game titles, which also include Odin, we've been able to prove that we have the capability, all of this, of course, supported by the financial stability of the company. And with the upcoming RPG titles as well as the legacy game titles that we have in MMORPG, including the Project Q that is upcoming next year, we are going to be tapping into and expanding into the global market. And this is a competitive lever that we have as a game company, the fact that we have extensive experience in providing a successful live servicing of the game titles. That is something that we are known for, so we will continue to harness that capability; and on top of which, in order for us to achieve global success, there are multiple levers that we'll have to work toward this. First is that we need to be able to build extensive amount of experience. Experience counts in this business. Recently we've seen some Chinese game titles becoming a quite success, but what they've been doing was that, over a longer period of time, behind the scenes, they have been really focusing on overseas servicing of the game titles that they've developed. So for us, in the existing game segment where the market is somewhat saturated, we now are faced with a mission to be able to explore into a future game genre. In that aspect, that building up of experience is quite important. And the second is also that what we need to do is learn quickly and establish our footing in the market and be able to apply our capabilities into developing new games, and this also hinges on our internal process. We are focused on increasing the engagement level of our users. And it has to do with efficiently running the process internally, identifying the needs that our gamer base has and responding very quickly. So all of this boils down to strengthening the basics of our business. I think that is where the secret to success lies. And we will continuously, of course, make investments into content and really focus our resources that will help us attain our goal.

[Foreign Language] The following question will be presented by Jin-Gu Kim from Kiwoom Securities.

[Interpreted] We would like to get an update on the schedule, the release schedule, of Chrono Odyssey and ArcheAge Chronicles for next year. And what are the business models for these games?

[Interpreted] Regarding the Chrono Odyssey, our goal basically is to go into CBT, closed beta test, by Q1 of next year, 2025, so right now we're in the process of preparing for the testing. And depending on, of course, the result of that first round of CBT, we will decide whether we will go into the second round of CBT. Basically our goal is to go into official release in the second half of the year. For ArcheAge Chronicles, the CBT is -- at this point, we're looking to run it in Q3 or in -- that's earliest, Q3 of next year; or second half of the year. Of course, we would have to wait and see what the outcome of that first round of CBT is, after which we will be able to fix the date, but at this point, our goal is for a release in the first half of '26 or in the summertime of '26. In terms of the business model, the main target is, as I've mentioned before -- it's the growth type. It's active RPG game genre, so it will take on the form of sales as a package. And also we will most likely completely get rid of the pay-to-win element and be -- and adopt a more monetization strategy that is in line with a global standard. These 2 companies -- or studios, as I've mentioned, have a very long history of supporting live servicing of game titles, so rather than just a sale of a single package and having just a one-off sale of the game package, we will leverage off of their live servicing capabilities, which will provide a basis for a stream of revenue as we offer interesting content to the players. All the specifics, we will be able to come back to you after the CBT is complete, and we will share with you more details when that time comes.

[Foreign Language]

[Foreign Language] The following question will be presented by Seungho Choi from Sangsangin Securities.

[Interpreted] I am Choi Seungho from Sangsangin Securities. I just have one question. Recently we've seen heightened competition amongst your peers, so it would have been quite difficult for you to effectively source games for publishing purposes. What is your edge in publishing games? And also, because there is higher level of competition, you may also need to make some equity investment into studios. What is your approach on that?

[Interpreted] So if I understood your question correctly: You were asking about our sourcing competitiveness. As you know, Kakao Games, since the establishment of the company, has been very closely working with our partners and have been effectively sourcing game titles, which translated into good business results. If you look at some of the small to mid-sized game studios in a specific genre such as the subculture games and PVE or collective PVE games and growth RPG games, there are companies that have good competitiveness in terms of servicing and developing those games. And we also have a very good reputation vis-à-vis these partners because we have long years of collaborating and working together with the game studios, so I can tell you that, in certain games genre, we are -- Kakao Games as a company is at the leading edge, so there are cases where the studios will come to us first for possible collaboration and cooperation. Having said that, the overall macro environment is to [ your ] disadvantage. The market itself is quite significantly depressed at this point in time, so the studios' capabilities, the smaller-scale ones, that is, for -- their capabilities to develop a game title that is up to a certain level has been significantly challenged because of the overall macro environment, but that doesn't mean that we as a game company can compromise the standards that we have with regards to the level of completeness of the game title. We must source games that really meets and satisfies the requirements and the expectations of the users in terms of the content and the systems that we provide, so with regards to strategic keywords that I had previously shared, we are, yes, actively looking for opportunities. And also, if need be, we are willing to also make equity investment as well. Over the past 3 years, there were many partners that we've worked together with. Some of them are part of our consolidated statement. And in some studios, we've just made minor investment, so it is quite fortunate from our perspective that we have a very solid sourcing structure by collaborating and working together with these partners and studios for us to source various, different types of high-quality games.

[Foreign Language] The following question will be presented by Jae-min Ahn from NHI Securities.

[Interpreted] I am Ahn Jae-min from NHI Securities. Just one question on Sena technology. I understand that the whole sell-off process was completed in Q3. And this should have been fully captured under P&L from discontinued business. It doesn't seem to be the case, so would there be some adjustments made to the quarterly report?

[Interpreted] Yes. Regarding Sena Technologies and it being captured under P&L from discontinued operation, as of end of September, we have actually sold off our stake as well as transferred our control of that entity. And they have been excluded from the consolidated numbers as of Q3, for the Q3 of this year, so it is captured under P&L of discontinued business. Maybe my explanation previously was not clear enough, so once again, I can tell you that, from the consolidated operating profit and consolidated revenue, the Q3 numbers as well as the cumulative numbers from Sena technology is noninclusive. Basically, also for comparative purposes, the numbers that you see for previous years, Q3 and cumulative-basis revenue and operating profit also excludes Sena Technologies. And they are currently reflected under a separate line item under P&L from discontinued business.

[Interpreted] Since there are no more questions in the queue, we would like to now close the third quarter 2024 earnings presentation by Kakao Game. Thank you very much for joining us this morning. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]