KRAFTON, Inc. (259960.KS) Earnings Call Transcript & Summary

Good afternoon. This is Sophie Lee from KRAFTON's IR team. I would like to start off by thanking investors and analysts from both home and abroad for joining our second quarter 2025 earnings release. Today, I have with me CGPO, Jin-Ho Oh; and CFO, Dongkeun Bae. For the benefit of investors from Korea and overseas, presentation will be made through simultaneous interpretation followed by consecutive translation during the Q&A. Do note that today's presentation is based on K-IFRS consolidated estimates, subject to change upon the independent auditor's review. With that, let me invite Jin-Ho Oh to present on KRAFTON's Global Publishing, Securing Future Franchise IP.

Hello, I'm Jin-Ho Oh, Chief Global Publishing Officer. Since the global success of PUBG, KRAFTON has continued to ask itself, what will be our next defining IP? Just as it's important to create a good game, it's equally critical that we ensure the game is well positioned in global markets and it becomes a long-term beloved game. This responsibility falls squarely on our publishing organization, which has taken on the role of not merely distributing game titles but executing the global success of KRAFTON's new IP. As declared earlier this year, KRAFTON has set a mid- to long-term goal of achieving KRW 7 trillion in revenue and doubling its corporate value by 2029. We believe that realizing this ambition requires both the continued expansion of the PUBG IP and the growth of new IPs. Our publishing division is leading the charge on that -- on the latter, focused on discovering new franchise IPs and translating them into meaningful market outcomes. Today, I'll be sharing the strategic perspective and direction behind how our publishing team is building these new IPs along with some of the early results emerging from these efforts. Now before diving into KRAFTON's global publishing strategy, I'd first like to introduce you to our upcoming pipeline from a global publishing perspective. The framework here is what we use to evaluate games and construct our portfolio. Rather than categorizing titles by genre or scale, we assess market maturity and whether ultimate game title already exists, based on which we group titles into 4 quadrants: pioneers, genre champions, challengers and emerging. Currently, 13 titles are in our global publishing pipeline under HQ, which are evaluated using this framework. Today, I'll briefly introduce 2 flagship titles from this lineup. First, Windless is an open-world action RPG based on the Korean fantasy novel, The Bird That Drinks Tears. This title is being developed with the unique universe captivating characters and compelling story line as it aims to establish itself in global markets. Next is Subnautica 2, a survival adventure game set in deep sea. Building on the strong global fan base of its predecessor, the sequel seeks to meet existing fans expectations while also expanding the reach of the Subnautica IP to new users. We're also preparing titles in the emerging and pioneer segments that can win over players through share gameplay quality. These are projects that aim to redefine what fun means or deliver deeply immersive experience of a certain kind, titles that could make audiences think, I didn't know KRAFTON could make a game like this. So once we're ready, we'll introduce them in the right way at the right time. To strengthen our portfolio in a sustainable and strategic manner, we are expanding our product lineup through 3 key approaches. First, we're proactively securing promising new IPs through external investment. A recent example is the acquisition of Eleventh Hour Games. Their flagship title, Last Epoch, has sold over 3 million copies since its official release in 2024. The game has been praised for its unique design and system depth in the ARPG genre. We are also exploring various content expansion opportunities and expect this title to become a defining franchise within the genre. The EHG case is just the beginning, and we plan to continue to actively acquire IPs across different genres and regions. Second, we're continuously investing in strengthening KRAFTON's internal development capabilities. Recently established studios such as OmniCraft Labs and Athena Department led by industry veterans such as [indiscernible] respectively, are both actively developing new titles. Each team is deeply focused on shaping unique gameplay experience. And we've also acquired JOFSOFT to further scale our in-house development capacity. Third, we're building a more flexible and scalable publishing structure through the second party publishing model. Our first 2PP title is Rivals Hover League developed by EF Games, a studio backed by KRAFTON, and this title aims to offer a distinctive player experience within the vehicle-based arena battle genre. Beyond Rivals, several additional 2PP projects are under review and development. Following the introduction of KRAFTON's global publishing pipeline, I will now share the strategic direction of KRAFTON's global publishing operations. As we have seen so far, we believe KRAFTON's publishing is building a robust pipeline across a range of genres and creative directions. But to make this lineup even more stronger and more impactful, we've sought to clarify one critical question. What is our way of publishing? From that perspective, the 2 core keywords that will define KRAFTON publishing moving forward are global and player community. KRAFTON already operates regional organizations across the globe and conducts publishing tailored to local user culture and market characteristics. At the same time, we prioritize direct connection with player communities, fostering trust through transparent communication and player-friendly policies, growing our IPs into beloved franchises over time. So early access of inZOI, which launched this March, is actually a clear demonstration of how our global and player community strategies translate into action. In terms of sales, North America, including the U.S. accounted for 29%; Europe including Germany and France for 28%; and Asia, including Korea, China and Japan, et cetera, for 25%. It was particularly striking to see strong and evenly distributed player response across all major global regions. From a community perspective, the results were even more compelling. During the early access phase, over 3,000 streamers organically joined our campaign. Of the 1,400 streamers whose regions we could identify, 23% were from North America, 52.6% from Europe and 13.1% from Asia, demonstrating balanced viral momentum across global markets. By size, participation included 35.5% large, 37% midsized and 27.5% small- to midsized streamers. We believe this clearly illustrates the impact of our regionally optimized and community-centric publishing strategy built on a global organizational foundation. Next, I'll briefly share some of the concrete numerical achievements of inZOI. inZOI delivered impressive results in both pre and post launch. Prior to release, we executed a series of campaign that amplified positive sentiment and drove inZOI to first on Steam's Wishlist. This reflected the excitement we were able to generate globally through publishing actions. Post launch, inZOI achieved over 1 million units sold, setting the record for the fastest selling package game in Korean gaming history. The title also ranked as first in the most popular games across 27 countries spanning North America, Europe and Asia, making a strong impression on players worldwide within a remarkably short period of time. We see inZOI as a prime example of how KRAFTON's global organization and community-first publishing approach can create real market impact. We remain committed to working closely with the development studio to ensure inZOI continues to grow into a long-lasting and globally beloved IP. So as we've seen so far, KRAFTON publishing is actively making meaningful moves across a wide range of areas backed by a solid and diverse pipeline. Beyond simply publishing games, we aim to walk the journey with player communities, turning titles into long-term globally loved IPs. inZOI is the first proof point of our strategy. It captured global attention and excitement in a short time frame, validating our strategic direction in the eyes of the market. We will continue to build on this success by delivering more successes like inZOI and further enhancing KRAFTON's distinct publishing competitiveness. Thank you. Next, our CFO, Dongkeun Bae, will present on KRAFTON's second quarter and first half 2025 business and financial results.

Hello, this is Dongkeun Bae, KRAFTON's CFO. Let me begin with the results of our efforts over the first half of the year based on the 5-year mid- to long-term plan which we announced in February. KRAFTON's revenue in first half was KRW 1,536.2 billion, and operating profit KRW 703.3 billion, which were a record high semiannual results. First half '25 results outperformed the high base of '24 first half, reporting a 10% growth. We will carry on with the annual uptrend through quality content updates and marketing campaigns. In terms of gaining new franchise IPs, inZOI, following its early access last March, is under development for its first DLC in August and in preparation for publishing as we continue to invest and onboard developers for new projects. Based on new development leadership onboarded by the second quarter, 3 studios are currently running the prototyping phase. In line with KRAFTON's strategic direction, we will secure competitive teams of developers from across the globe. Also, with the acquisition of Eleventh Hour Games, we now have Last Epoch, further diversifying the IP portfolio, and we plan to expand and grow it into a franchise. Next, on financial results and updates on engine for future growth. First, revenue breakdown by platform. Q2 PC platform revenue was KRW 219.7 billion, up 15% year-over-year but down 32% Q-over-Q. Despite absence of large-scale collaborations, PUBG PC recorded a year-over-year growth, thanks to wide-ranging in-game content, Contender system and the black market, but on a Q-over-Q basis, there was a decline due to seasonality factors. First half revenue hence posted KRW 543.2 billion, rising 25% versus last year, and we plan to continue the growth momentum based on main streaming content offerings as we move into the second half. Mobile platform revenue in Q2 was KRW 427.6 billion, down 15% year-over-year and 20% Q-on-Q. Seasonality drove Q-o-Q revenue trend downwards but compared to last year, excluding PUBG IP-related incentive received from our partner in Q2 of 2024, we see a double-digit mobile revenue growth. X-Suit skin release in April was well received in the global markets and PUBG Mobile rewriting daily revenue record, which was the driver behind the year-over-year growth. And BGMI grew both year-over-year and Q-on-Q on the back of strategic collaborations with local Indian brands and enhancements made to users' game experience. Hence, first half revenue was KRW 960 billion, up 6% versus first half of '24, as we expect to see both traffic and revenue growth driven by upcoming mode updates for Metro Royale and World of Wonders in the second half and effective monetization strategies. Q2 Console platform revenue was KRW 9.8 billion, up 12% year-on-year and down 25% Q-over-Q, while first half revenue was KRW 22.9 billion, rising 13% versus first half of '24. For the PUBG IP franchise, we are quite actively investing into content to deliver new forms of enjoyment to its fans while highly anticipated content update is scheduled for the second half of the year. We plan to offer cultural experience beyond gaming based on IP collaborations, the effectiveness of which has already been proven. For instance, collaboration with aespa compared to NewJeans last year, drove 70% increase in revenue after the release until most recently. And by running events in connection with PUBG Nations Cup eSports events held last weekend, we saw the power of content at a franchise level. In Q3, we plan to showcase a variety of premium content through more than 6 collaborations, including 2 supercar collaborations, Bugatti included, and western IPs and artists. Supercar collaboration particularly is highly liked by the player base, so we will have one with Bugatti in Q3 and with other brands in Q4. We're also gearing up for collaborations whereby core content across PUBG IP titles will be shared, and through co-marketing, we will be strengthening synergies across the franchise. We plan to offer distinctive PUBG experience through cultural elements that can be enjoyed by Western users and younger age group as well. Also by hosting joint eSporting event for PC and Mobile, which is a new attempt, we plan to solidify PUBG IP presence. And aside from titles currently serviced live, we continue to challenge ourselves for PUBG IP franchise expansion. BLINDSPOT, which is a top-down shooter game, will be showcased to global users during August gamescom, and extraction shooter game, Black Budget, will go through closed alpha test end of the year. Following PUBG, inZOI is KRAFTON's new original IP, gaining a solid position as global IP with a longer life cycle. We did an update in June to activate modes and have seen UGC expand even though it is at its early stage. We will release MAC OS version for the PC platform in August to broaden the user touchpoint, and it was pitched as a game using Apple's upscaling tech at the recent WWDC. In August, the first DLC, the new city, Cahaya, update is upcoming. During the August gamescom, we will host a meet-up session where global users and creators can get together and we show new content and share thoughts, which in turn will be actively incorporated into future development and updates. inZOI's community-based publishing strategy will continue to be refined and is gearing up for grander goals in the longer run, above and beyond the single play live simulation genre. Now let me update you on Subnautica 2, which was originally scheduled for launch in the second half of the year. Subnautica 2 was one of KRAFTON's flagship new titles being developed based on the original Subnautica IP. Three members of the previous leadership contended that the game be launched as is, but content was lacking, requiring additional development unable to meet the milestones set by KRAFTON. We therefore requested the leadership to come back to finish up the development and the content work to which they declined and declared that they will go ahead with the game release. Hence, KRAFTON decided to replace the 3 former leadership and appointed Steve Papoutsis of Striking Distance Studios as the Head of Unknown Worlds to support the development staff to focus on their development work. What's important is that now the entire team with no turnover is focused on shaping the depth of the game under the goal of early access launch in 2026. To give support and strengthen competencies of the development team, we overhauled the previous earnout scheme and added new incentive programs. It's regrettable to say, but the 3 former leaders let down KRAFTON and fans' expectation that they will do their best to launch a fully polished game. Rather than covering up the problem and going to early access with a title that doesn't meet our internal standards, we believe the right thing to do was to replace the leadership, however inconvenient the decision may be and to exert our efforts to more than satisfy the fans of Subnautica. This was the way for us to salvage and protect Subnautica IP and KRAFTON's corporate value. Through the legal proceedings, we believe we have an opportunity to clarify the facts and liabilities. Since the litigation is ongoing, I cannot open all of the details, but we'll do so when we can. Next, I will run through investment outcomes for securing franchise IP and development teams. As mentioned beginning of this year, to achieve 5-year mid- to long-term plan, we are already -- we are actively attracting production leadership and the development team and have onboarded more than 80 developers and secured 7 new projects. And now we have a flagship IP in the Action RPG genre, Last Epoch, following the acquisition of the U.S.-based Eleventh Hour Games as well as carrying out a total of 5 minority stake investments into domestic and global studios. Of these investments, we made a follow-on investment into Boundary after the initial one in 2023, gaining more shares, and they are now developing Project NUT, which is an Asian dark fantasy action RPG title. KRAFTON is preparing for the future of game industry, powered by AI with its research in AI source technology and game service application. We continue R&D to secure AI technologies, and such efforts have been meaningful as 3 papers have been named as spotlight papers, which is a prestige given to top 5% research by ICLR, which is a premier gathering of AI professionals. We also unveiled 3 open-source, inference-optimized language models, applying KRAFTON's proprietary learning algorithm. The model showed better performance in mathematical reasoning and will be used in games requiring advanced inference and for upscaling AI tech for games. We analyzed existing model weaknesses and developed our own learning technique based on reviewing the errors to improve accuracy of reasoning and efficiency of learning both at the same time. And in June, we developed and unveiled Orak, which is a benchmark that can measure AI's gameplay skill level. Orak is a benchmark that quantifies and evaluates the gameplay capabilities of language models, and we developed it so that a total of 12 games to enable assessment of playing skills, data collection and reinforce learning of language models. Using Orak, we will be able to enhance design capabilities for LLM agent as we continue to refine AI tech that are optimized for games. In India, we're making various efforts to not only expand localized content offerings but also fortify touchpoint with new players. BGMI is making the effort to broaden its brand across on and off-line through strategic collaborations with major local brands. In Q2, we partnered with India's biggest motorcycle maker, Hero bike; as well as Sting, India's #1 energy drink company, to make and sell hundreds of millions of bottles, thereby strengthening our branding in India. Also, through the partnership with #1 telco, Jio telecom, we launched a special rate plan for gaming and gave out game items guided by stronger local strategy. We are also focused on developing localized in-game content and actively marketing the game to drive new user inflow in India. KRAFTON India publishing is planning on developing and introducing content that best fit Indian players' preference in Q3 and are solidifying the BGMI branding through new marketing content that leverages different media, including music and animation. Next is on operating expense and operating profit for Q2. Labor cost increased year-over-year to KRW 146.8 billion on new hires, while it fell Q-over-Q due to the base effect from bonus recognition in the first quarter following record-high operating profit. Platform fees and cost of revenue increased year-over-year as they are linked to directly serviced PUBG PC and Console and BGMI revenue, but it fell Q-over-Q reporting KRW 83.9 billion. On the back of Unreal Engine 5 upgrade in connection with PUBG 2.0 and rise in third-party development calls for mode development and hosting of multiple eSporting events in Q2, commissions increased year-on-year and Q-on-Q reporting KRW 96.2 billion. Marketing expense reported KRW 26.1 billion, up year-on-year and Q-on-Q on marketing activities for live servicing games and new titles. Stock-based compensation increased Q-on-Q on higher stock price, but with the change from cash-settled vested options to stock-settled option in August '24. Cost recognition underwent certain adjustment driving SBC down KRW 20 billion year-over-year. On the back of lower revenue and increase in costs, Q2 operating profit was down 26% year-on-year and 46% Q-on-Q to KRW 246 billion. First half '25 operating profit was higher by 10% versus first half '24, reporting KRW 703.3 billion. Adjusted second quarter EBITDA accounting for SBC was down 25% year-on-year and 41% Q-on-Q to KRW 296.3 billion, and first half adjusted EBITDA increased 4% versus '24, coming in at KRW 801.4 billion. For the nonoperating account, there was FX-related loss due to weak dollar, leading to a nonoperating loss of KRW 222.2 billion in Q2. All in all, Q2 net profit was down both year-on-year and Q-on-Q to KRW 15.5 billion with the first half net profit for 2025 down 44% versus previous year to KRW 387 billion. Next, let me brief you about the investments that were made in the first half of '25. We, at KRAFTON, continue to actively invest for sustainable growth. As mentioned, to secure the Last Epoch IP, we will be completing the investment for 100% equity of Eleventh Hour Games at KRW 132.4 billion with closing to take place in August. We also made 5 minority equity investments, investing early into rising studios in markets like France and China so as to gain publishing rights. Also, we're actively making investments to drive synergies with KRAFTON's business and games in the global market. We entered an agreement to acquire 39.4% stake in Neptune at KRW 155 billion, which is a company in the business of ad tech and games, securing a majority shareholder status. And the transaction was closed as of July 9 and will be consolidated into our accounts from the third quarter. The deal was made in consideration of the growth potential of Neptune's ad tech business and synergies with KRAFTON, and we are reviewing the feasibility of global expansion. Aside from this, we will be acquiring 100% stake in ADK Group at KRW 710.4 billion, Japan's top 3 advertising agency and animation business. The deal is 100% cash transaction pending FDI approval. KRAFTON and ADK will strengthen collaboration to unlock synergies between game and animation. Also by leveraging ADK's advertisement and marketing business capabilities, both tangible and intangible, we will strengthening KRAFTON's presence in Japan and further expand partnerships with Japanese companies to the extent that was unfeasible before. This ends my presentation. Thank you.

[Operator Instructions] We'll take the first question from Eric Cha of Goldman Sachs.

My first question relates to the second half momentum for the PUBG IP franchise across different platforms. I would like to understand as to what the traffic trend looks like for PUBG in each of the platforms that you are servicing the game. And you've also mentioned during the presentation that there is more content that is upcoming compared to the previous year. And can we then expect that this will drive further increase in the wallet share? Or would there be some fatigue effect? For instance, since you've mentioned there will be 2 supercar collaborations, do you think that there will be ample opportunity for the players to actually purchase and engage in both of those supercar collaborations? Or do you think that there may be some cannibalization? Another question is that you've previously communicated that you will be introducing at least one AAA title on an annual basis. Does that statement continue to be still valid as of today? Would like to gain some color as to what your next year pipeline would look like. And the last question is regarding inZOI. You've mentioned that this was a successful case of you showing the new titles. I would like to know as to what was the key driver behind driving such a successful viral impact from the early access of inZOI, especially the one that is underpinned by this community-based strategy.

So you asked three questions. This is the CFO. I will respond to your first one, and I will turn it over to our CGPO for the second and the third question. Regarding the traffic for our PUBG across different platforms, we see the trend is different depending on which platform you're talking about. But for those of you who've been following our company for quite some time and have interest in our company would know that we usually have stronger performances in terms of traffic and revenue in Q1 and relatively weaker in the second quarter. So because there's school season starts in the second quarter, so usually the traffic shows a downward trend as we enter into the second quarter. So compared to Q1 figure, yes, there's been a slight decline. However, compared to the business plan that we set up at the early beginning of the year, I can tell you that we are quite solid and hence we do not have any particular concerns about the traffic trend going forward and for the quarter as well. Regarding the second question that was on content, which Oh will respond.

Now when we made our second quarter earnings release previous year, I remember saying something to the effect that for the third quarter collaborations, our expectation is actually towards a record high result. I remember saying that at the time based upon the interim data that I was able to access. As of today, if I were to make the comparison, last year, we had the NewJeans collaboration, and this year, the aespa collaboration is ongoing. And although it's difficult to make just an apples-to-apples comparison, we -- I can tell you that the result from the aespa collaboration is quite impressive. So based upon the same period on an annual basis, we are seeing better results as compared to our original expectation. Now you also asked a question about the fact that since we're providing a lot of content, would that not create some cannibalization. And you cited the supercar collaboration, which I think is a fair question to ask. But what's quite important is having the traffic, which is very healthy. That really lays the foundation. And on top of that comes the attractiveness and the appeal of the product that we are offering, which can drive revenue efficiency. So basically, upon a very healthy base of traffic, it really boils down to what and how the PUBG IP franchise actually tackles this element. So if you look back at our past supercar collaborations, you can understand what it is that I'm trying to say. Basically, individual collaboration skins, of course, they were quite attractive and appealing, but depending on what the preference of the players are because these players have been playing our game over a longer period of time so they show different level of preferences. In the past, we had collaborations with Aston Martin and McLaren. And depending on different characteristics, basically, there are people who would prefer Aston Martin versus other supercar collaborations. So it doesn't necessarily mean that just because we're providing a lot of collaborative content that, that's going to trigger cannibalization. It is rather how appealing the new skin is versus the existing skin the players are currently using. That's what's the key and that's the challenging aspect. So based upon what we are seeing right now, I can assure you that you can have healthy and good expectations for this going forward as well. Responding to your second question, what we seek for within KRAFTON is to release and introduce multiple number of AAA titles on a yearly basis because gaming is a commercial success-based industry. You never know which game title is going to become a blockbuster AAA game title, you would only know post launch. Hence, we are going to make sure that we can really identify and find a game title that can become into a franchise IP. Hence, we're going to have multiple game titles on the batching base. And regarding some of the upcoming titles, for Subnautica 2, yes, it's pushed back to next year, but we believe that we will be able to meet greater level of expectation of the player base. I say that because we will be able to offer, a, ample amount of content that really meets the expectation and standards of the players. Another title is Palworld. Basically, this is a very popular IP and beloved IP, and we're right now under development for a mobile version of Palworld Mobile. So that is also upcoming as well. Although I cannot disclose specific information at this point, we will be able to share with you some more information about other titles as well. There is more highly anticipated game titles that are currently under development. Responding to your third question, we've taken the approach of creating a viral together with the community, together with the community of creators rather than resorting to just a very traditional method of marketing. So not just a one-way communication to the players, but we focused on the community snowballing effect, creating advocates and then triggering the viral, which will in turn additionally attract and create additional advocates. So that was the approach that we took. inZOI is actually a good example. We've been continuing -- we've been taking a play test, and in so doing, we really activated the community. And based upon the feedback, that for people who are used to playing live simulation games, they really loved inZOI, playing inZOI. However, there are also other groups of people who are not very familiar with playing such live simulation games, so they did not know as to how to play the game. So upon that feedback, from the publishing perspective, what we did was, prelaunch, we gathered a community of creators. And we had them together. We explained to them how to play simulation games and why it's fun to play such game. And by doing that, we converted them into our advocates, which in turn also triggered viral effect. And not just that, before the release of the game, we've given a lot of different mission to these advocates. And so they were able to learn what can be done in game. And the players, by watching that, also were able to enhance their understanding of how to play the game. Another example that I can share with you is that we've listened to what -- the feedback of the users and listened to what it is that they need to do and also what it is that should not be done. Basically, we've been continuously in real-time communication with the community, and the communities have really liked that sort of an engagement that we've been engaging in. And one of the good case in point is the Denuvo issue that emerged, and the players have given us a quite negative feedback. So we've made assessments in terms of the business, the brand as well as from the community perspective, and we've decided to deactivate the Denuvo aspect, which really created a good viral and had really satisfied the player base.