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

Good afternoon, everyone. This is Sophie Lee from KRAFTON IR team. Thank you to all investors and analysts at home and abroad for joining KRAFTON's Third Quarter 2025 Earnings Call. Joining us today are Mr. Sean Hyunil Sohn, CEO of KRAFTON India; and Mr. Dongkeun Bae, our CFO. For your convenience, the presentation on India and financial results will be accompanied by simultaneous interpretation, while the subsequent Q&A session will be interpreted consecutively. Please note that today's financial results are based on preliminary consolidated figures under K-IFRS and may be subject to change following the independent auditor's review. Now Mr. Sean Hyunil Sohn will present on KRAFTON resonating with India.

Good afternoon, everyone. I'm Sean Hyunil Sohn, CEO of KRAFTON India. KRAFTON formally entered India in July 2021 with BGMI. Since then, for 4 years, we have worked to take root and grow together in India guided by 2 pillars, publishing and investment. Today, India ranks around fifth globally in terms of GDP. However, its gaming market is still in its early stages, about 1/5 the size of Korea and roughly 1/30 of the U.S. or China. Even so, it's growing faster than almost any other market, expanding by over 15% annually. And with such a young and dynamic demographic, we see significant future potential. Please allow me to share how KRAFTON has been partnering with this very promising market and how we are preparing for its next phase of growth. In India, mobile accounts for over 80% of gaming revenue, far exceeding PC and console. Among these, BGMI has firmly established itself as a national game among Indian players over the 4 years since its launch. Cumulative registered users have now approached 250 million, a very clear sign of BGMI's broad reach. Building on this loyalty, paying users this year have grown by over 34% versus last year. And this was driven by value for money products and items tailored to local preferences, encouraging even cost-conscious players to enjoy their very first positive purchase experiences. Also on October 1, the online gaming bill took effect, explicitly banning real money gaming. On the other hand, general games like BGMI are classified as social gaming and are expected to operate under a more predictable regulatory framework. With detailed guidelines to follow, eSports is expected far surpassing any other eSports titles in India, further fueling excitement among fans. We believe that this momentum deepens loyalty and engagement, and we are making the investment accordingly. Alongside the publishing as an effort to grow together with the Indian market, from day 1, we established a dedicated local investment team focused on gaming and digital entertainment. To date, we have executed 17 investments totaling KRW 300 billion. Among them is Nautilus Mobile, a cricket game developer. We first invested in February 2022 and later acquired a controlling stake in March 2025 to jointly enter the cricket gaming market. Several of our portfolio companies have shown remarkable growth in revenue and valuation since our investment and some are now preparing for IPOs. Going forward, we will continue identifying early-stage companies with high growth potential and strategic synergy with KRAFTON and seek growth opportunities altogether in Indian market. In 2025, we further advanced brand collaborations, expansion beyond Hindi-speaking regions and localized content and products initiatives that gained momentum in 2024. The Go South initiative launched in 2024 significantly broadened our user base while localized skins and content boosted user retention and revenue. Also reflecting team's growing interest in OTT-driven animation, our first short animated series using BGMI IP was very well received, 5 episodes achieved over 170 million views. And so, following this localization strategy, we expanded server coverage from central and southern regions to include northern areas by early next year, bringing previously network-constrained users to BGMI. Through UGC, the user-generated content mode updates, we will keep delivering diverse content, aiming to expand our user base and strengthen engagement next year. Beyond BGMI, over the past 2 years, we launched multiple first-party and third-party titles. And starting next year, we will develop and test India-focused games and familiar genres, working directly with local developers to create proven local successes. We will also transition the publishing of Real Cricket 24, the flagship title of Nautilus Mobile to KRAFTON India to grow both its revenue and users. Given Cricket's significance as India's national sport, we see substantial growth potential and are advancing new titles with multiple teams while securing licenses for teams, leagues and national teams, building a new growth engine after BGMI. India's market remains relatively small and challenging for many global publishers. Yet as with China's once unimaginable trajectory, we believe India's potential is truly immense. And thanks to BGMI, we have a solid local foothold and a strong partner network through investment and collaboration. So, building on this foundation by combining KRAFTON's development and publishing, we aim to contribute to India's gaming growth and sharing its rewards. We ask for your continued interest and support as KRAFTON takes on new challenges in India. Next, KRAFTON's CFO, Mr. Dongkeun Bae, will present Q3 2025 results.

Good afternoon, everyone. This is the CFO, Dongkeun Bae. In the third quarter of 2025, KRAFTON recorded growth within the PUBG IP franchise with a revenue of KRW 870.6 billion and operating profit of KRW 348.6 billion. The cumulative revenue through Q3 2025 stood at KRW 2.4069 trillion, up 15% Y-o-Y and cumulative operating profit surpassed KRW 1 trillion for the very first time in the history of KRAFTON within just 3 quarters. PUBG PC achieved its highest ever quarterly sales in Q3, surpassing not only last year's strong Q3, but also the Q1 peak season, demonstrating how accumulated operational know-how such as content design and monetization balance is translating into tangible results. Major mobile titles again outperformed Y-o-Y, driven by competitive content. This was a quarter truly highlighted the operational capabilities of all of our core live services of the PUBG IP franchise and their outstanding performance. KRAFTON is evolving into an AI-first company, and we will progressively expand investments. AI first goes beyond simply adopting technology. It redesigns the organization as a whole to boost productivity at a company-wide level and accelerate growth. Already, we have adopted AI across many work domains, including game development, servicing and measurement support, thereby automating workflow and enhancing efficiency. Through many attempts and trial, we'd like to lead AI innovation across the global gaming industry. Next, I'll move on to financial performance and key progress relating to securing the new growth engine. First, I'll touch upon the sales performance by platform. Starting this quarter, Neptune is consolidated, and the game revenue is reflected in PC and Mobile, while advertising revenue is included in others. PC revenue of the Q3 stood at KRW 353.9 billion, which was up 29% Y-o-Y and 61% Q-o-Q, marking the highest third quarter in our history. PUBG PC sustained traffic-driven growth via continued collaboration content with aespa, Bugatti and G-Dragon, creating a virtuous user traffic and buzz. Through dense content updates, PUBG PC sales exceeded even Q1 2025 levels, underscoring the very power of PUBG IP. Other than that, inZOI, Subnautica and Neptune's E turner return also made a contribution to Q3. Q3's mobile platform posted revenue of KRW 488.5 billion, up 15% Y-o-Y and 14% Q-o-Q. Both PUBG Mobile and BGMI delivered steady growth through theme modes, collaborations and localized content. PUBG Mobile posted strong results year-over-year with Transformers themed mode and new X-Suit, which received positive feedback around the world. BGMI also achieved its highest quarterly revenue ever, driven by fourth anniversary India exclusive skins, localized content, reflecting India's unique culture and server expansions to improve the UX solidifying itself as India's national game. The console revenue totaled KRW 10.2 billion, down 14% year-over-year, but up 4% Q-o-Q. Lastly, other revenue recorded KRW 18 billion, up 113% year-over-year and up 261% Q-o-Q, driven by Neptune's advertising business. Next, I'll move on to PUBG IP franchise. PUBG PC console continues to grow on the back of solid traffic, while preparation for service transition to PUBG 2.0 is ongoing based on research and development. The ongoing IP collaborations extend compelling culture experiences that go far beyond gaming. And in Q4, we plan to share multiple collaboration content within the franchise to drive synergy, including purge collaboration. Still growing traffic continues to drive PUBG PC's expansion. And as of Q3, MAU increased by 9% year-over-year, and the number of paying users grew by 21% compared to the same period last year. The R&D focus of PUBG 2.0 is centered on 3 priorities: upgrade to Unreal Engine 5, well-made in-game modes and expanded UGC. Our UGC Alpha service conducted in Q3 confirmed the very spread of creator content and positive feedback. In 2026, we plan to introduce a new play mode in full scale beyond Better Royale and update the payday mode in the first half 2026, which is jointly developed with the Star Breeze Entertainment. For the new potential fans, we are continuing to take on new challenges within the PUBG IP franchise, expanding the brand's reach. We are continuing to develop new types of PUBG IP titles. For mobile products, we are continuing to maintain a stable live service based on diverse modes and PUBG IP joint content. First, we are continuously offering new play experiences through diverse gameplay modes and advancing the UX. And going forward, we aim to make PUBG Mobile a platform via new theme modes, IP collaborations and World of Wonder UTC mode updates. In addition, we are jointly providing high-profile IP collaboration content with PUBG PC and host the first-ever joint PC mobile eSports event, namely PUBG United 2025 to expand the franchise and enhance the brand value. In India, BGMI continues to expand localized content referred local users, maintaining effective live operations while appealing content continues to be released, including diverse global IP collaborations and a new exit. As a result, core fandoms of PUBG Mobile and BGMI continue to grow, strengthening the very foundation for sustainable growth for the future. Next, I'll move on to our current state of exploring the new franchise IP. We're continuing to expand our new product lineup. And as of November 2025, we've secured 11 new projects. And all of them as our proprietary IPs and the newly recruited production leadership will take on the challenge to diversify the genres. Going forward, we'll continue to broaden our scope of genre exploration by recruiting specialized high-capability teams and secure new franchise IPs in line with our 5-year plan. Moving on to our Palworld Mobile KRAFTON's key new title. Palworld Mobile aims to pioneer the mobile open-world survival crafting genre by recreating the originals core gameplay for mobile. The core fun element would be the Pal collection and breathing, open-world survival for survival and building. We'll showcase the first public reveal at the G-STAR Demo booth on November 13 for the very first time and conduct alpha test in December in selected regions to gather feedback on core gameplay, including combat and survival systems. KRAFTON is making company-wide efforts to systematize its AI capabilities and translate them into tangible service value. The AI technology is rapidly advancing in the global market. And under such transformation, we would like to embrace AI first as a core strategy and proactively embrace them. We will redesign the organizational structure and ways of working, boosting company-wide productivity and development efficiency, thereby accelerating the speed of growth. We will start by building AI infrastructure so that all members can use AI routinely, enabling more attempts and faster execution, spreading the ground for creative experimentation. In R&D, we are participating in the government-led SK Telecom Consortium selected for the Elite team for the National Foundation Model project. Together with the SKT Consortium, we are developing the 500 billion parameter foundation model and establishing an end-to-end in-house AI system that spans large-scale data training to service integration to enhance CPC sophistication and AI leadership in games. Held on October 30, 2025, at the NVIDIA GeForce Gamer Festival, we unveiled PUBG AI development status and service plan. In Q1 2026, through the PUBG Arcade mode, we plan to launch it by offering PUBG players a new AI-driven strategic and interactive experience. Next, I'll move on to key operating expenses and profit items for the third quarter. For personnel expenses rose to KRW 155.5 billion Y-o-Y and Q-o-Q due to workforce expansion and Neptune consolidation. For application fees and cost of sales increased to KRW 128.6 billion, reflecting growth in PUBG PC and console and BGMI revenue, which we directly service. For commission, which rose to KRW 141.6 billion due to Outsourced PUBG 2.0 development and on World ligation and hosting of the PNC eSports event. As for marketing expenses, driven by gamescom and live service marketing and Neptune impact, the figure stood at KRW 43.3 billion. Due to lower stock price, stock-based compensation declined to KRW 5.4 billion. Despite higher costs, the third quarter operating profit rose sharply to KRW 348.6 billion, up 8% year-over-year and 42% Q-o-Q, driven by strong revenue growth. Adjusted EBITDA of Q3, reflecting stock-based compensation reached KRW 389.8 billion, up 7% year-over-year and 32% Q-o-Q. Moving on for nonoperating items. FX gains from a strong dollar in the third quarter delivered KRW 138.1 billion, driving net income of KRW 369.4 billion, up 204% Y-o-Y and 2,278% Q-o-Q. This concludes my presentation. Thank you.

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

I have two questions. The first is that for both PUBG PC and PUBG Mobile, a lot of competitor games are launching into the market. And do you see such impact from these competitor titles when it comes to PUBG-related metrics? And also, which metrics do you refer to, to make that decision and gauge the impact? I also want to ask what mid- to long-term response plans does KRAFTON have when it comes to responding to these competitor titles? My second question is regarding the five-year investment plan that was shared earlier this year. And in today's presentation, KRAFTON has introduced its new AI-first strategy. And I'm curious, would this AI-first approach impact the investment plans that were set up in the earlier this year?

Responding to the first question regarding competitor titles, I will answer separately for PUBG PC and then PUBG Mobile. First, beginning with PUBG PC, I would assume that this question is taking Battlefield 6 in mind when asking the question. And up until Q3 of this year, our traffic has been doing very, very well and the launch of Battlefield 6 did slightly bring an impact to those figures. One of the key metrics, of course, is traffic and the Steam PCU metrics is also publicly available, so I would imagine our investors and analysts would be looking at those figures as well. And when Battlefield 6 was launched, of course, there was a lot of hype around its launch, and it's also a very well-made game as well. But if you take a look at the data, including Steam PCU, you can see that the figures are dropping pretty rapidly. So, the impact was there in the beginning of the launch of Battlefield 6 towards PUBG's traffic. However, we believe that the PUBG traffic remains very solid. The PUBG PC has been in service for around 8 years now. And this is not the first time a competitor title was launched into the market. There were other competitions that have been launched throughout the years. And the reason behind PUBG PC being an evergreen IP is because despite the competition in the market, we take it in as a new catalyst to focus on driving further user traffic and also providing good content to users. And this creates a virtuous cycle that led to such solid figures that we are seeing now. Actually, I was quite curious how Battlefield 6 would be. So, I bought the game when it was launched and I played for a while. And I also played the Battle Royal mode that was available within the game. And this is based on my personal experience playing Battlefield. It's that it's quite fun when you begin playing it. But then after a while, you begin to realize why users are quick to drop off playing from the game. It lacks the newness and freshness that every session of the PUBG game provides to users. And also, it doesn't really have the raw edge that PUBG is known for. So, there is a structural difference when it comes to the 2 games. So, what I would like to say is that if we continue on the live service that we are pursuing now, we are confident that PUBG will be able to remain an evergreen IP and continue well. And in case of PUBG Mobile, yes, the launch of Delta Force Mobile and [indiscernible] Mobile, our competitor titles did impact the traffic. But if you look at PUBG PC, it has transitioned to a free-to-play title in 2021, but PUBG Mobile has always been a free-to-play title in 2021. And while it is true that these competitor title launches like Delta Force Mobile did lead to a downward trend when it comes to user traffic. But what is important is that -- and this was included in the presentation before, the number of paying users and also the monetization policy working very well, and that is proven in the metrics of our sales year-over-year and quarter after quarter. In conclusion, when it comes to operating a live service well, of course, it will be great if the traffic continues to grow and the ARPU continues to grow, this would naturally lead to increasing sales. But what's more important is that we understand the environment surrounding the market. So, when it comes to a well-operated live service, we need to understand when we need to take a defensive stance or when we need to take a more aggressive stance in pursuing growth. And based on a traffic that is grown and developed through these strategies, we need to monetize well. And we need to accumulate the right type of know-how depending on how the environment and the market changes. And we believe this is proven through the way PUBG IP franchise has persisted. Moving on to your second question, the impact of KRAFTON's AI-first approach to the 5-year investment plan that was shared earlier this year. I would say the biggest change would be in terms of the change in headcount and expansion of the headcount at KRAFTON other than new development teams focusing on developing new proprietary IPs under the first-party development model and also the deep learning or AI-related teams, we have imposed a hiring halt company-wide. What I would like to emphasize here is that this AI-first approach is not intended to reduce cost. Rather, we want to improve productivity through this new type of technology as it has the potential to do so. And for individuals to make use of this technology very well, we want each individual to be embedded with AI capabilities. And in order to drive this quicker, the company-wide hiring has come to a halt. Would this persist in the longer-term or not, it remains to be seen. However, the figures that were shared early on this year in regards to the 5-year investment plan will not go through a significant change. However, we still have to wait and see the exact results. And once this has been put together, it will be announced publicly.

The next question is from [indiscernible] from DS Investments.