Kakao Games Corp. (A293490) Q4 FY2025 Earnings Call Transcript & Summary

[Foreign Language] Good morning, and good evening. Thank you all for joining the conference call for the Kakao Games earnings results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on Kakao Games' Fourth Quarter of Fiscal Year 2025 earnings results.

[Interpreted] Good morning. This is Lily from Kakao Games IR team. Let us begin 2025 Fourth Quarter and Full Year Earnings Presentation. Today, I am joined by our CEO, Michael Han; and CFO, Terry Cho. We will start with our CFO's presentation on 2025 Q4 and full year earnings. As a disclaimer, today's earnings release includes estimates of K-IFRS-based consolidated statement, which are subject to change upon the auditor's audit.

[Interpreted] Good morning. This is Terry, CFO at Kakao Games. In 2025, Kakao Games reorganized its business portfolio with a selective focus and was able to strengthen financial and structural fundamentals based on stable cash flow and flexible resource management. Also in allocating resources, which were previously focused mostly around MMORPGs, we expanded the allocation to cover wide-ranging drones and PC and console platform and streamlined organization, process, operational system in stages to better respond to global servicing requirement. In 2026, we will focus on 2 main aspects. First, while maintaining a conservative stance on spending, we will manage P&L volatilities underpinned by stable earnings from our major titles. And with the upcoming of AAA titles slated for a rollout in Q3, we will speed up profitability enhancements starting the second half of the year, creating an impetus for transition towards earnings normalization. Second, for global targeting PC console project, we will accelerate speed of execution as we share information on development and preparation based on testing status. We will be conducting validation of market relevance and completeness of the game, reflecting global tests and community feedback. And in so doing, we'll share key information up until the date of the release. Based on this, we will be entering into a phase where we reap tangible results before the end of the year and build growth momentum leaning into the global PC and console pipeline. Moving on to the fourth quarter and 2025 annual financial performance of Kakao Games. Q4 consolidated revenue was down 26% year-over-year and 22% Q-over-Q, reporting KRW 98.9 billion. Operating loss recorded KRW 13.1 billion. FY '25 full year revenue came down 26% year-on-year, reporting KRW 465 billion with annual operating loss reporting KRW 39.6 billion. In terms of the revenue breakdown by business segment, PC games saw year-over-year growth of 45% on PUBG's collaboration update. But due to multiple events held previous quarter, forming the base effect, revenue fell 30% Q-over-Q to KRW 29.9 billion. PUBG during the November G-STAR offline event was able to expand the user's touch point and is maintaining steady traffic according to key metrics. In 2026, through strong collaboration with the game studios, even from the road map update phase, we will broaden domestic user base and will refine operations, servicing, marketing in order to maintain and improve top line efficiency of the update momentum to sustain stable earnings position. Last December, Path of Exile 2 rolled out new content and new class through its third expansion pack update, offering wider range of gameplay options. Until the official launch, we will continue update based on users' play experience and feedback, and we will focus on enhancing and refining content quality now that we have identified sufficient latent demand. For the new PC title lineup, we will conduct external tests and refine the game build concurrently and achieve optimal performance and validate game stability as we refined the game build. The Cube: Save Us is slated for an early access rollout on Steam platform following final stages of service operations and system checks. ArcheAge Chronicle will go through external test during the first half of the year, ahead of which we're going through the test build checks and core system stabilization. And after validation is made on optimization and content quality, we plan to launch the game in the fourth quarter of 2026. Chrono Odyssey released the developers note sharing with the community on the progress of the game and had repeated tests against the core Western user base, focusing on gaining stability and completing the depth of the game. The owing to the absence of tangible results coming from new titles, mobile game revenue declined 39% year-on-year and 19% Q-over-Q to KRW 69 billion. Domestic Odin service revenue ranking went through a slight adjustment due to the lack of major updates. But despite the release of competing titles, its core user traffic is stable, and we expect to be able to see momentum in line with the major update milestone. In 2026, we will formulate long-term servicing strategies that can expand our core traffic base, not only around top-tier users, but also for mid- to low-tier users as well. ArcheAge War opened new server last December, integrating global services as part of aligning the operational framework. Upon this basis, we will ensure operational stability of servers, reconfigure competition landscape and conduct updates around key content offerings, so as to enhance user engagement and to improve traffic quality. Starting with SMiniz, which opened for pre-registration last week, we will consecutively showcase strategy RPG game, Dungeon Arise in Q2 and Project OQ and Odin Q in the second half, which are the AAA titles. During the first half, we will prioritize stabilizing our profit and loss profile and conduct cost controls and create an impetus for profitability enhancement in the second half of the year through results from new titles coming through starting Q3. Next is on the operating expense. Q4 consolidated operating expense decreased 18% year-over-year and 16% Q-over-Q, reporting KRW 112 billion. Annual operating expense fell 17% on year, recording KRW 504.6 billion. In terms of the breakdown, labor costs saw a 4% decline year-on-year and 1% Q-on-Q to KRW 36.5 billion on the back of workforce realignment around key businesses and concurrent efforts placed behind reallocation of resources and company-wide total size control. In 2026, with new title upcoming from Lionheart Studio in the second half of the year and with hiring of talent required for global PC business, labor costs may slightly inch up. However, actual spend will be based on reallocation priority and on the premise of rationalization in close connection with the performance results we gained from new titles, which will be controllable and managed with flexibility. Owing to momentum-based execution and rationalization stance we've been adhering to, marketing spend was down 31% year-over-year and 21% Q-on-Q to KRW 7.2 billion. In 2026, according to rollout milestone for AAA titles, we expect marketing spend will meaningfully expand starting the second quarter. Since we have high hopes for good performance, we will spend ample amount of resources during the prelaunch as well as the launching phase and after the release, make timely changes to the budget based on the initial metrics trends so as to quickly downsize inefficiency phase, taking on a nimble control approach. Commission, which includes fees paid to the platform, game studios and payment for the infrastructure due to changes in the revenue and platform mix fell 20% year-on-year but increased 15% Q-on-Q, reporting KRW 66.2 billion. In 2026, depending on the performance from the new lineup and changes in the revenue mix that follow, commissions may fluctuate. We will continue to monitor the contract structure and cost items, rationalize infrastructure and optimize operations all in parallel to enhance cost efficiency so that cost and performance could together as a leverage. On infrastructure expansion from game studios, depreciation and amortization increased 2% year-on-year, but owing to changes in the intangible asset base subject to amortization, there was a decline of 3% Q-on-Q, reporting KRW 11.9 billion. Following streamlining of cost, other expense, inclusive of SG&A was down 8% year-on-year and 6% Q-on-Q, reporting KRW 8.2 billion. Under such stance on cost in 2026, we will maintain conservative cost discipline and will leverage window of opportunity when results from new milestones become visible through timely execution of spending, striking a balance between profitability and growth momentum. In 2025, Kakao Games rebalanced its portfolio and realigned cost structure, driving fundamental improvements centered around cash flow and profitability. In first half of '26, there may be a drag on earnings in light of internal and external environment and time line of new releases, but underpinned by steady revenue stream from core titles and with added lineup of new titles, we will control volatilities in profit. Also starting Q3 of FY '26, we will enter a phase in which blockbuster titles are lined up for release. And from then onwards, global pipeline will follow. For quite some time now, we had a cycle of test, feedback enhancements for each AAA titles. So we'll be speeding our preparations to meet key milestones step by step in order to create an impetus for earnings rebound in the second half of the year. We will also explore meaningful investment opportunities for growth, leveraging financial flexibility that we have, but will only act on such and profitability, global risk criteria is met with -- from a short-term perspective. We would like to thank all the shareholders and investors for your continued support and interest. This ends the presentation on the fourth quarter and annual 2025 earnings. We will now take your questions.

[Foreign Language] [Operator Instructions] The first question will be provided by Seung Lee from IBK Investment & Securities.

[Interpreted] Recently, if we look at the trend, your new rollout plan for the new titles have been pushed back most recently starting last year. And you did mention that until the official launch of the new titles that the company will be sharing with us as to the update of how things are going. So for the time line that you shared this time around, what's the level of confidence that we can have that, that will actually be taking place as according to the time line that you shared? And second question is that as you prepare for your new game titles, it will require more level of labor cost and more number of headcount. So can you guide us on what your guidance is for labor cost and marketing spend in 2026?

[Interpreted] So this is Michael. Thank you for your question. We are clearly aware that there is a bit of a concern with regards to the delay in the new lineup time line with the adjustments that we have made. However, I could just assure you that it was based upon an in-depth internal discussions, ample internal discussion, and it is not due to any structural issues or problems that we're facing in the development phase. Basically, we have decided on this, the adjustment of the time line as part of our strategic decision, fully being mindful of achieving stability of the live servicing as well as in creating the mid- to longer-term performance. Basically, because all of these game titles are AAA titles, there were significant amount of marketing preparation as well as allocation -- rational allocation of resources that is required. And so reflecting that, we wanted to further enhance on the visibility of the upcoming lineup of titles, and that was the basis upon which we made such changes. To be a little more specific, if you look at Odin Q, in order for us to actually maximize the scale of initial success of this single title and to make sure that we have the right environment to allow MMORPG's large-scale PvP content to work over the longer term, we decided to actually expand on our initial plan and do a global one built rollout, including countries like Taiwan and Japan and not just limiting to a domestic release. And so we made a slight change to the launching plan end of Q2 to make preparations for the optimal preparation and for making additional development and refining on the technical aspects on the premise of a global rollout. And according to that adjustment, other new lineup time line had also been aligned to that adjustment. And if you also look at other titles like ArcheAge Chronicles and Chrono Odyssey, our overarching approach is to further enhancing on the completeness of the game build. And in the process of conducting the test and going through the optimization process, we wanted to make sure that we fully reflect all the enhancements that is required. So once again, we had made certain adjustments and because we wanted to further expand on the validating of the development. So through these efforts, basically, the time line has been adjusted so that we could minimize the operational risk as much as possible. So we are in close communication with each of the development studios for each of our game titles, but we are very much committed towards working towards releasing all these games before the end of the second half of the year.

[Interpreted] This is CFO, Terry. Responding to your question on the labor cost. As I have mentioned previously in the opening presentation, in 2026, our discipline will be to manage the aggregate amount of our workforce. And also we will place priority on reallocation of the resources. So these will be the overarching discipline that we will work under in 2026 when it comes to labor cost. Now in the second half of the year, we have a new title coming up from Lionheart Studios, which will require selective addition of capabilities. And also, we have global market targeting PC game that is upcoming on which we would need to further supplement and add core capabilities. So we do plan on adding such capabilities going forward. Having said that, these additions or these additions to our workforce will be done in a very selective manner. So we will be controlling the costs somewhere around or hovering around 5% compared to the Q4 figure of 2025.

[Interpreted] So just to elaborate a little more, this is Michael. I guess we are currently in a transition period where the AI tools and solutions are not fully used in the servicing or the development phase, but we can assure you that we've been making appropriate preparations for the past 2 years, which is equipping us with the capability to achieve efficiencies when it comes to our headcount management. So basically, we can -- without the significant increase in our headcount or in the workforce, we have in place an environment in terms of technology and preparations put in place where we could actually achieve such performance or achieve such without a significant increase in the headcount. Also in terms of the marketing budget for our new titles, we've been putting in efforts so that we can make marketing spend decisions underpinned by data analytics. We've been conducting quite a bit of data analytics as well as system development to enable that to happen. So especially for the global business, it's quite essential that we make our marketing decisions based on the performance and the results that we are actually able to generate. And hence, for these AAA titles because they are quite massive in scale, we would need to conduct certain brand marketing that is commensurate to these blockbuster or AAA titles. But we are certain that we have the preparations in place whereby we could actually conduct marketing in a quite efficient manner.

[Interpreted] Yes. This is Terry. Just to add a little more on the marketing spend because we have large new titles upcoming in Q3, we do plan on spending and expanding the marketing spend starting the second quarter because it is quite essential to support the AAA title releases. In terms -- if I were to give you certain figures, on a quarterly basis, the marketing spend share could actually rise even up to 15% against our revenue on a temporary basis. But on an annual level, we will be controlling it to around or below 10%.

[Foreign Language] The following question will be presented by Junhyun Kim from HSBC.

[Interpreted] Just one question from me. I would like to gain more understanding of the company's strategic direction. You have multiple number of game studios underneath you and one would expect that by releasing many different new titles that the cycle will be quite speedy. But recently, we've seen delays in the rollout of such new title lineup. And so -- and also, we are not seeing any expansion of the studio portfolio that the company has. So I would like to understand as to from the management's perspective, what is the direction that you are currently envisioning for your company?

[Interpreted] Yes, this is Michael, the CEO. Responding to your question, in terms of what our core competitiveness is, as you know, the recent delays that we've seen is not attributable to any structural problem, but it actually depends on the level of difficulty of a certain game genre and the time frame that it takes for that game to be developed, which hinges on the proficiency level of the development team as well as whether there is that familiarity that is already built with that game. And for us, we have very early on made the decision to not be just focusing on the mobile-only platform. We have the capabilities and we have the structural preparation in place to actually support various different platforms such as PC as well as various different markets, including the global market. So since we have not yet released these new titles, it's not feeding into our financial performance yet. But once they are released, we are most certain that because we have the -- we have the structure in place and all the preparations and efforts have already been put in, we will be able to -- across the full chain of the platform and the market, we will be able to reap good results. On the second part of the question on company's direction forward, I think I can define that by sharing with you 3 key concepts and key words. First, our priority is for us at this point is to drive a rebound in our financial performance. We believe that with the release of the lineup of new titles that we have, we will be able to achieve that rebound before the end of this year. Second, as I've mentioned, we do have lineup of titles that can cater to the requirements of different platforms as well as to the global market. So with the portfolio that we have, which is being developed by the current development team as well as our future endeavors, through the investment, having a structure whereby we could really diversify into different types of game genre, be it small and medium will be a key competitive or key direction for us into the future. Third is, as everyone would be able to agree with is the advancement of AI technology. It's impacting all of the industry sectors. And I believe that in 2 to 3 years' time horizon, it will significantly also transform the industry that we are in. So we need to be able to respond to that transformation. There will definitely be an impact and actually is currently an impact on service as well as development. On the development of these games, there are solutions that are available. And I believe that in about 2 to 3 years' time, it would really have a significant impact on game development. So having the right level of acceptance and being able to actually leverage those solutions by our game studios with different game genre, I think it is going to be a key determining point as we go forward. AI will also have impact on the servicing side, which includes marketing, our decision-making as well as the data analytics. And this will continuously make things more efficient in terms of the services, and it will further refine the services that we offer. So in terms of the AI technology, I believe that for our organization and as a company as a whole we need to be prepared for the use of such AI technology.

[Foreign Language] The following question will be presented by Thomas Kwon from Daiwa Securities.

[Foreign Language] [Interpreted] I have to say that from an analyst perspective, who's covering the company as well as from the capital market, it's quite difficult for us to project on the earnings of a company that is deficit making and also to calculate the corporate valuation. I would understand and appreciate the difficulty that the management is feeling as the company is making a deficit and is loss-making. But if you look at your peers like NCSoft and Netmarble, they basically have a structure in place where the profit is made under which they have plans to make investment into the new lineup and also under which that they pivot around a specific strategy. So my question is this, when do you think that the company will actually break free from this loss-making streak? Do you have any plans for restructuring or liquidation that will help you with that process? Because if you look at the current trajectory, the decline in the top line revenue is much faster compared to the cost savings that you are able to generate. So what are some of the efforts that the company is putting in, in order to overcome such loss-making streak?

[Interpreted] So thank you for that comment, and I agree fully, and I'm on the same page with what you have mentioned. And I also keep those aspects very deep in my thoughts. What -- in terms of the priority, I think we have conducted rationalization and streamlining of our business operations and removed all the unnecessary or inefficient aspects, if we view this from the game industry so that we could really focus on the core of the game industry. We thankfully were able to successfully deal with the equities that we were holding on our subsidiaries. We went through divestments. And also at this point, what's quite most important for us is for us to drive a rebound in our financial performance. And in order to do that, it is not that we are going to engage in any replace investment. We will make use of the lineup that is already in place and the relationships that we have or the development studios that we already have secured and just putting in more efforts so that we could speed up that whole process. In light of the changes in the market and the competitive landscape and the preferences of our customers and the users, it's quite important that our development is really up to speed with those demand and requirements. So what we need to do is to exert more efforts so that we can really drive at and satisfy the expectations that the market has. And so as announced, we believe that with the release of the new titles that are upcoming in earnest in the third quarter, we will be able to enhance on the visibility of that improvement in our financials. So when the new titles are released in Q3, there may be about a month or 2, I guess, adjustment in the schedule. However, once the new titles come up in Q3, we expect and we look forward to improvement in our financial performance starting the fourth quarter.

[Interpreted] This is CFO. Just to elaborate a little more. If you look at the reason why our financial performance is being impacted, the fundamental is being impacted from the financial perspective is because of higher level of development costs that we are incurring from our development subsidiaries because of the delay in the launching time line or the rollout time line of the new titles. So that is the key reason. So the flip side of this is because we have a very clear reason once the new titles start to be released, and if I could say this quite boldly, even if the success is not guaranteed, we can recoup the development costs that we had put in. And also, we've been putting quite a bit of effort around our global PC console business through the XLGAMES and Ocean Drive. And once these studios start releasing the new titles, we believe that this is going to have a very big financial leveraging effect. So -- and also, looking at Lionheart Studio, they've been doing quite well on the mobile side, but the upcoming title had been taking an extended period of time. So it's not helping with the financials at this point. So once it does come, I believe that it will have a strong impact.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] This ends the Q4 and annual earnings presentation of Kakao Games for 2025. Thank you all for joining us. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]