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

[Interpreted] Good morning. I'm Lily from Kakao Games IR. We will begin our fourth quarter and full year 2024 earnings presentation of Kakao Games. Today I am joined by CEO, Michael; and CFO, [ Terry ]. We will first start with our CFO's presentation on the 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 audit.

[Interpreted] Good morning. I'm [ Terry ], CFO of Kakao Games. Let me run through 2024 fourth quarter and the annual financials. Q4 consolidated revenue of Kakao Games was down 21% year-over-year and 17% Q-over-Q to KRW 160.1 billion. On 2024 full year basis, revenue fell 14% year-over-year to report KRW 738.8 billion. There was not only Q-over-Q decline in VX revenue but also a decline in PC and mobile game revenue with operating loss reporting KRW 6.3 billion. On a full year basis, operating profit recorded KRW 6.5 billion, down 92% year-over-year. In 2024, in the midst of stagnant top line growth, Kakao Games endeavored in many ways to reignite its growth momentum. To lay the groundwork, guided by a strategy of having a selective focus, we are implementing measures to improve our fundamentals such as through enhanced financial liquidity, and we sold off noncore assets and businesses, diversified strong for the global market and segmented our core businesses of AAA PC and console games into specialized organizations. Up to the first half of this year, we will focus on successfully driving fundamental enhancements and solidify the foundation for our core business. Based on this, starting the second half, we will bring both revenue growth and profitability enhancements. Now in terms of revenue breakdown for Q4, in PC games, PUBG traffic growth continued, posting 57% year-over-year growth, but on waning of impact from last quarter's large-scale collaboration updates, revenue reported KRW 20.6 billion, down 40% Q-over-Q. Path of Exile 2 that started early access last December has now expanded its domestic user base through stable servicing, securing reputation and user traffic. Revenue contribution in the short term is limited due to the way early access revenue is recognized as there is accounting-based revenue deferrals. But as the game proves to have better popularity and accessibility versus its prequel, domestic user base continues to increase steadily. After its official release, it is expected to establish itself as a long-term pipeline, becoming a stable and sustainable revenue source. We plan to disclose peeks into AAA titles one by one this year as they are titles that are poised for a full-fledged expansion of global PC and console platform. And in order to have global users fully experience distinctive gameplay mechanics, we plan to highlight large-scale global CBTs and in-game trailers to ensure that our competitiveness is well featured across the global market. In mobile games, with no new titles introduced and due to natural decline of existing titles other than major titles, including Odin and ArcheAge WAR, revenue fell 30% year-over-year and 14% Q-over-Q, coming in at KRW 109.2 billion. Despite it being a challenging environment, both internally and externally and with established titles ever extending their life cycle, we are finding ways to strengthen our competitiveness by leveraging technology and data capabilities in step with users' behavior patterns of content usage and speed of growth. As we strategically implement ways to strengthen user engagement in alignment with the characteristics of each title, we will continue to endeavor to drive revenue momentum of current titles as well as drive up probability of success for new upcoming titles as well. 3 years into its release, Odin still enjoys an uptrend in content usage and, following large-scale domestic update in December, ranked #1 in terms of revenue, attesting to elevated user engagement. ArcheAge WAR will also soon reach its second-year anniversary, and we run campaigns and enhancements based on interactive communications with the user base, which are proving effective as can be seen from the inflow of new and returning users. In 2025, we're working on new mobile game titles from different genres, and the major ones that will be a driver of earnings rebound will come in the second half of the year one by one. Goddess Order, which is scheduled for release in Q3, aims to achieve significant performance in the global market, while Project Q, which is a AAA title to be launched in Q4, will bring sustained revenue momentum as well as sizable improvements in profitability. In the absence of new product launch from VX and due to slow seasonality, other revenue fell 10% year-over-year and 8% Q-over-Q, coming in at KRW 30.3 billion. Next, on operating expense. Q4 consolidated operating expense was down 12% on year and 12% on quarter, reporting KRW 166.3 billion. On a 2024 annual basis, it was down 6% year-on-year to KRW 732.3 billion following year-over-year increase in payment to game studios due to increase in new titles under second-party publishing. In terms of expense breakdown, on the back of head count increases related to developers for new PC and console games and strengthening of global business, as we phased out projects with low future potential, we derived cost efficiency gains as planned. And as such, labor costs declined 2% year-on-year as well as 2% Q-over-Q, reporting KRW 44.2 billion. We continue to phase out noncore businesses and projects, so there may be a one-off cost increase in the first half of 2025, but we expect fixed labor cost to be flat year-over-year. Marketing expense was up 30% year-on-year but down 28% Q-on-Q to KRW 11 billion. Marketing resources fluctuated in line with the new game time line, but driven by efficiency efforts, we've been able to lower the marketing spend share against yearly revenue on a sustained basis. In 2025, we will expand strategic marketing in step with AAA game releases and under the mid- to longer-term ROI plan, which we expect will drive up the size of annual spending for the year. Having said that, we will be cautious of how the market and competitive dynamic changes, and we'll keep the share of marketing spend against yearly revenue at around 10% level. Commissions paid is made of fees paid to the marketplace and game studios as well as infrastructure fees, which is impacted by game revenue mix and changes and hence was down 18% year-over-year and 19% Q-over-Q, coming in at KRW 72 billion. Depreciation and amortization fell 33% year-on-year and 1% Q-over-Q to KRW 13.5 billion on decline in intangible assets. Other expense comprising of cost of sales of Kakao VX and corporate-wide SG&A, despite VX revenue decline, there were one-off promotional spend, driving other expense down 3% year-on-year but up 1% Q-over-Q, reporting KRW 25.5 billion. Lastly, I would like to thank all of our shareholders and investors for the interest and support you've shown us at Kakao Games. This ends the presentation on 2024 Q4 and annual results, and we'll be happy to take your questions now.

[Foreign Language] [Operator Instructions] The first question will be provided by Kim Jin-Gu from Kiwoom Securities.

[Interpreted] I have one question. It seems like the company is going to place full momentum behind global expansion and focusing on certain global markets in 2025. Could you give us some color as to which markets they are and what your plans are?

[Interpreted] This is Michael. Responding to your question about our global market endeavors, the overall direction for us is eventually to increase the revenue mix and the size of revenue from each of these countries or geographies. Basically, depending on which region you're talking about, their characteristics, the level of expectation and the types of genre that the gamers prefer as well as the potential size of the revenue, they are all quite different. So we will be employing a very tailored strategy for different markets around the globe. So if I could just break down the regions for you, first off, if you look at North America and the European market, most of the games, as you know, for a global success, we are focusing on the North American market. Basically, the North American and European market success is quite critical. Especially when it comes to PC and console games, the main markets are the Western-focused market. So it is based off of that footing that we will be expanding into the global stage. And good case in point is the ArcheAge Chronicles. And if you take a look at that, you will see where our focus is placed. In terms of the mobile game market in the Western world, the types of the games that are top ranking in terms of revenue are like puzzle, strategy, idle as well as collecting, PvE types of games. And most of these types of games that have been successful on the global stage actually do bring a very good performance across all of the other Asian countries as well. So on the mobile side, we are making appropriate preparations for different genres of games. And at this point, we are undertaking development as well as tests for some of the games that's been developed within the in-house studio as well as by our partners. So in the near future, we will be able to come back to you with more information. Next will be on China and Japan. First, China. As you know, I personally had experience of working with regards to Tencent, the large big tech company of China. And also, I was working in China back in 2006. So I personally as a CEO really see the importance and the value of China as a marketplace. However, due to the regulatory environment and the political backdrop and the lineup of games that Kakao Games had, I have to admit that it was not a very perfect fit. But I feel that -- so at that time, there weren't that big of an opportunity from Kakao Games' perspective. So we have not been very aggressive at tapping into that market. However, now we've seen changes in the regulatory environment. And also, the lineup of new titles that's being developed inside Kakao Games, if you take a look at those types of games, I believe that the possibility is now opening up. However, in the Chinese market, you don't gain just a one-off success. You need to go through multiple level of projects in a smart way and very quickly in order for you to be able to achieve a certain level which will enable you to succeed in that market. So from this year, we are going to really tackle the Chinese market much more aggressively. So at this point, we do have some game titles where either in-house internally or through a third party that we were in the process of securing or have secured the relevant licenses. And there are a lot of discussions that are ongoing for additional license opportunities. So we will be able to soon share with you more details. Last but not least is Japan. Japan is very important as well as it has quite a lot of meaning as a game market because it has very distinct characteristics and it's quite different from other markets. So typically, just because a certain game title is a global success doesn't mean that it's going to bring good performance or bring good results in the Japanese market because in Japan, there is a very specialized culture, and you need to be able to provide and meet that type of preference and taste that Japanese gamers have. You need to be able to be fully aware of their cultural differences and what they want in terms of the content. Especially the depth of the content has to be quite deep. And your understanding of that market as well as Japanese culture is quite important in coming up with a game title that could actually drive a meaningful level of performance. So in Japan, the types of game genre that's quite popular are like subculture, action RPG and MMORPG, and we are building our experience in these different game segments. In terms of the subculture genre, the hurdle is quite high in terms of satisfying the gamers. So we internally have a very stringent filtering process where we would be very selectively selecting the subculture game that will work in the Japanese market. But if you look at the casual puzzle games, which works well on the global market, which also we could take to easily access the Japanese market could -- would play an important role. So some of the SRPG games that's developed by Ocean Drive, we believe that we have potential to really leverage off of mobile platforms as well as Nintendo. And so we will continuously explore the IPs and the narratives and the games that really fit with the cultural code that Japanese people prefer, and we will be making appropriate preparations. So that was a quite long-winded answer because I walked through different regions and countries. But just to summarize once again, yes, our overarching global expansion-related core critical pillar is the global market, which is centered around the Western market, which is North America and Europe, and basically for mobile and PC alike. And whether it's China or Japan, we will come up with games that really satisfies the requirement that these countries and regions have. We will be making a combination of all of these elements that would best work in each of these regions and countries and select the genre and the types of games and invest into such so that we could derive meaningful results. And of course, the global games that we develop, we will definitely utilize that for different regions like China, Asia and Japan to derive incremental revenue opportunities.

[Foreign Language] The following question will be presented by Jung Hoyoon from Hangug Investment & Securities.

[Interpreted] You've mentioned during the presentation that your strategy will focus on PC, console and AAA game titles. And we see that the results of Path of Exile 2 is quite steady, which is very positive. But if you look at most of the packaged games, the initial revenue impact is high, but over time, it actually wanes. So there is some concern regarding the sustainability of your game titles. What are your plans to address these types of concerns?

[Interpreted] So I think I can tackle that question from 2 different perspective. First is the cross-portfolio, I guess, element across PCs, console and mobile, and second is specifically looking at PC and console-related strategies. First, if you look at our PC and console game servicing model, there are actually 3 types of models that we could really think about that could help us further grow in certain game genre and to expand on our portfolio, first of which is the snowballing model, which is all about, for instance, single player-based, growth-based package and downloadable content as well as franchise element or a combination, using a combination of these different elements to benefit from the so-called snowballing model. So I guess the best way for me is to talk about this specific example, which would be Monster Hunter Wild and Path of Exile 2. So those 2 games are the ones that actually adopt the so-called snowballing models. So what that means is that at the initial process, maybe the sales begin with a very low level, but with the continuation of DLCs and the release of the sequels, basically, we are able to enhance the level of completeness of the certain game title, really building on that IP and building on the highly loyal gamers and gradually really expanding the result coming from this title. That is what a snowballing model is all about. And if you wanted to see other examples of Kakao Games, it would be games like Chrono Odyssey and ArcheAge Chronicles. So -- but one thing that really differentiates us is that over a very longer period of time, Kakao Games have been able to build its live servicing experience with regards to the MMORPG games. So unlike other single player-based games, we are able to adopt different live servicing-related models into these types of MMORPG game titles. And also aside from the RPG genre, what we are doing is we are -- we can actually combine the package model plus our live service experience, which really works as a key for us so that we could provide not a pay-to-win model, but after gamers purchase the game package, they are able to selectively and, if they wish, make that in-game payment in order to enhance their game experience. So we give them that leeway and that buffer. And another good example will be the Ocean Drive's zombie survival, God Save Birmingham. What we do is we provide various seasonal updates in order to extend the period between the DLC and the PLC of the game. So basically, it's not a pay-to-win model. However, we are able to bring various different elements of the live servicing in order to enhance the convenience and also to make the -- provide more variety of elements for the gamers that could help -- and also for us as a company to expect for sustainability of the stream -- the revenue -- the earnings stream that we make. And the second type of the model, unlike the first one, these will be more purely single player-focused, and basically, in playing these games, you can look forward to DLCs and the sequels. But basically, there is no element in terms of the long-term live servicing aspect, and basically, the game ends when the player reaches the end. And a good example of those will be games like Veil of Witch and Section 13 and some other well-known global IP such as Witcher, Elden Ring and Fire Emblem. So these are the large franchises that fall under this type of a model, whereas the investment and the cycle of the investment and the core play are the key elements. Basically, as you move into the latter part of the life cycle of these games, what happens is that unlike in the beginning phase, there's going to be accumulated sales and revenue. So it's -- it uptrends, and also the IP-based fandom actually grows. And so that's a very -- that's the type of model that Witcher as a global IP was able to employ, and so -- but of course, this type of a model will basically be decided and it will be very genre-specific. And basically, what -- depending on what the studio does well and also the adjustment of investment sizes will also be entailed. And the last type of model are the models that you see for MOBA as well as shooting games where it entails a large size of traffic, like it's a PvP game and it has a longer and more extended PLC life cycle. So basically, when it becomes a real success, then we can really look forward to a very good business result. But admittedly, the competition is very fierce for these types of games, and it also takes a lot of time and effort to really identify the core fun factor. And also, it's very hard to predict how the market is going to respond once we come up with these types of games. But having said that, this is a very important game genre for a company like Kakao Games, and we are in the process of developing and preparing these types of models and these types of games. So once we are more prepared, we will be able to come back to you with more information. But once again, from our internal perspective, we consider this as a very important game model for us. So in sum, I walked through 3 different types of game genre models that we could be using for PCs and console segment. From the corporate-wide perspective, what's important for us is to have the right portfolio in place that will ensure a steady business performance, cash flow, et cetera, and other types of business performances. And so not just PC and console, but we are also -- we will also be making investment onto the mobile side as well. We will be using a partial monetization model and applying that to MMORPGs, puzzles and other action RPG games in order for us to ensure a steady revenue stream as well as stable business results. So it's important for us that we come up with a game portfolio that will enable us to enjoy those outcomes.

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

[Interpreted] My question relates to whether you have plans to participate in any of the game shows for the PC and the console segment. If so, please share that information with us. And also, do you have any large-scale CBTs upcoming?

[Interpreted] Yes. Regarding the time line for participating in different game shows, basically, our large titles like Chrono Odyssey and ArcheAge Chronicles, the action RPGs as well as some of the mid-core titles that are being developed by Ocean Drive, yes, before they are officially released, we want to make sure that we continuously feature these games across the global stage. What's most important, however, is the users' experience and the feedback that we get from them. So we are very mindful of managing the time from which it is first showcased to the timing where it starts to be serviced. So we don't want to extend the time period. We want to make sure that it's kept within about 1 year or so. So we're -- I know that there's a lot of curiosity and a lot of people want to know about these types of games, and they want the previews to these game titles. But we are cautious, and we want to control that lead time in terms of the time line so that it doesn't get too extended. So under that approach, once again, what's most important is the user CBT. Especially for titles like Chrono Odyssey and ArcheAge Chronicles, yes, there's going to be CBT. And depending on the time line of the CBT, that will help us determine as to the timing of when and how we are going to participate and set up booths in the game shows. I can tell you that we have the relevant marketing plans already in place. And in terms of, first of all, Chrono Odyssey, we are very committed in running the CBT in the first half of the year, and the studio is working very hard to meet that time line as well. In fact, this week, we were going to be taking a closed internal core test within -- internal core test to check on the security aspect and to screen the different build of this game title. Same goes for ArcheAge Chronicles. Basically, in April, we're going to have a closed user -- closed-door user test, and we'll be checking various different aspects. And all of that schedule will be carried out according to plan.

[Interpreted] Well, this brings us to the end of Kakao Games Fourth Quarter and Full Year 2024 Earnings Release. Thank you, everyone, for joining us. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]