KRAFTON, Inc. (A259960) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. I'm Claire Lee from KRAFTON's IR team. We're grateful to analysts and investors, both domestic and from overseas for joining us today, 2022 earnings conference call. Please note that today's earnings presentation is K-IFRS consolidated estimates, enhanced business and financial information are subject to change following the independent auditor's review. Also, forward-looking estimates are based on assumptions and actual results may differ from figures included in today's presentation. With that, I will invite our CFO, Dong-geun Bae, to provide business and financial highlights.

[Interpreted] Good afternoon. This is CFO Dong-geun Bae of KRAFTON. Outdoor activities that were halted with COVID saw earnings recovery in Q3 2022. And KRAFTON, a global gaming company, we're faced with changing business conditions. With post-COVID reopening, the global gaming market that has seen years of expansion saw an overall market size decrease. From a macro perspective, the environment has become more challenging. However, with platform, service and region tailor strategies to meet the expectations of gamers, KRAFTON was able to record a stable quarterly results in the new given environment. I believe the game industry will face a new chapter. In the past year, an important driver of game industry growth was bringing PC and console-tested games to the mobile platform. But going forward, the mobile platform, just like other platforms, will have to approach the gamers with new gameability and content. We look forward to the day that our competitiveness that comes from the pursuit of original creative and new game mobility over multi-platforms being recognized in the market. Throughout all the platforms, including the PC, console and mobile, KRAFTON has provided fundamental value centering on the user and focus on new gameability. We believe continued creation of original creative is the way to cement our position as a global top-tier game company. I sincerely thank investors and analysts who constantly support our challenges and worthy attempts and all the [ second ] management of KRAFTON and independent studios. Now I will brief you on our major business results. First, on the PC business. Our PC revenue in Q3, the growth of PUBG PC grew 48% Q-o-Q at KRW 131.1 billion. This is the largest quarterly revenue in 3 years. PUBG PC traffic remains solid after transition to free-to-play and acquisition of new players continue. The Deston map that was introduced in Q3 is receiving enthusiastic response in the Western market, especially from the North American market, leading to traffic increase from the region. The company is seeing inflow of new users from diverse regions after the transition, and we will increase map launches and event content that will resonate with users in different regions. In our last earnings session, we briefed you on the popularity of the Workshop content that was introduced in July. Time limited seasonal shop in September introduced McLaren supercar collaboration on the PC platform for the first time, leading to very enthusiastic responses. PUBG PC is ranked as the #1 weekly top-selling game for 17 consecutive weeks since July 12 on the [indiscernible] platform with only in-game sales. Q4 is a low season. So the company is executing strategy for [indiscernible] also increased content with gamers, both in off and online spaces. I believe that you are well aware of the fact that there are only a few titles eligible for eSports. PUBG esport is a content that could be enjoyed by the fans and the one that encourages communication. It is positively influencing user return. On the invitation from the Dubai government, KRAFTON is hosting the PUBG Global Championship. 32 teams from around the globe have participated all offline. It is the first PUBG PC esport to take place in the Middle East and is expected to present MENA region and global PUBG fans a new esports experience. As it's proven with results after the transition to free play, with a level that's a live service and attractive contents, PUBG PC service is expected to continue to grow. Now to our mobile business. Mobile revenue decreased 12% Q-o-Q and 26% Y-o-Y at KRW 282.4 billion. The revenue decrease with Indian BGMI service hold is the more regrettable. Mobile revenue in Q3 recorded a similar level to Q3 2020 when the pandemic had already spread. The influence from reopening was relatively greater in Korea and in Japan, but the other regions showed similar traffic levels compared to the previous quarter. Paying users and ARPU all showed growth and still holds a favorable position to other Battle Royale genre games. The game -- in-game concert of Blackpink in July and September's introduction of new map, Nusa with strength in short play time, led to traffic enhancement and high-value product game increased revenue growth. PUBG Mobile will increase users with entry-level phones in new emerging markets through lightweighting of [ builds ]. And with map content for different regions, will continue increasing traffic. For paid content, the company hopes to focus on content that will get the attention of game users and with new in-house sports cars game and collaboration with world-class football stars such as Messi in premium supercars. To restart the BGMI service, the company is making efforts in diverse way and continues to contribute and investment -- invest for the development of the Indian game market. Now on to our Console business. KRAFTON is servicing the most number of Console titles since 2017, including Tera, PUBG and Unknown World Subnautica. Console revenue in Q3 grew 22% Q-o-Q and 134% Y-o-Y at KRW 11.7 billion. Stable revenue of Subnautica and PUBG [ test and map and pass ] received good response from the Console users leading growth. For your reference, the combined PC and Console revenue accounts for 33% in Q3. Console revenue is not big now, but is expected to grow huge in the future. Callisto Protocol is to be launched in December 2. The development completeness has been verified in October. There is much anticipation for the game from our global audience especially the game market in the U.S. and Europe. A media preview took place last October with a presence of 150 press. The general feedback on the play was that it is very fresh and new, lively with high tension level and excitement. In-depth cross and remote combat were well received, too. The company wishes to lead the evolution of the survival horror genre and deliver fresh funds to the action horror and also Action Adventure game users as well. [indiscernible] demonstration is possible in the upcoming 3 Star Event so I look forward to your interest. Aside from the Callisto Protocol, the company is working on many new titles in different genres for the PC and Console platform, including Project Black Budget, Project Roam and Subnautica 2. KRAFTON is going to enhance our competitive edge with continued AAA PC and console type of development. We also continued to secure regional development capabilities and IP expansion. In North Americas, we established Striking Distance Studio in 2019 and acquired Unknown World in 2021. We are working on a new studio formation in Canada to work on the development of Project Windless. Global developers to work on the project has already been recruited. We have been expanding our presence in Europe as well with equity investments in the region studios. The company executed our investment in March to [indiscernible] in Poland securing publishing rights to new shooting genre or new titles and acquired Neon Giant studio in Sweden in September. The Ascent, a PC console game released by Neon Giant was recognized for its gameability with nominations to game awards by various media. The talent there has worked on development of AAA titles in global majors. These talents are currently working on their next release in the open world FPS genre. New action and adventure titles that has passed our internal new development approval process will be developed for the PC and console platform in Europe. KRAFTON is in an expansion phase for platform, regions and new IPs. These [ less ] challenges and attempts must take place to create a global IP. To this end, KRAFTON is accelerating speed together with global developers across diverse regions. With our differentiated identity and global competitiveness, we hope to expand our global IP.

[Interpreted] Now on to our financial results for Q3 2022.

[Interpreted] Q3 consolidated revenue stood at KRW 433.8 billion. This is a growth by 2% on a Q-o-Q basis and a decrease by 17% on a Y-o-Y basis. Now on to our OP. On a consolidated basis, our third quarter OP recorded KRW 293.5 billion, which is an increase by KRW 32.1 billion Q-o-Q basis and a decrease by KRW 33.2 billion on a Y-o-Y basis. Now on to our labor cost. With our business growth, there have been an increase in our headcount. Compared to the previous quarter, it has seen a rise by KRW 5.2 billion at KRW 102.1 billion. Over the previous year, it was an increase by KRW 21.3 billion. Now on to our app commissions and cost of sales. Well, this item has seen a decrease by KRW 2.3 billion on a Q-o-Q basis. And then on a Y-o-Y basis, it was a decrease of KRW 11.9 billion at KRW 47.8 billion. It's mainly due to the service hold of BGMI for which we do direct publishing. And now on the commissions paid, with earnest preparation for Callisto Protocol launch in December, there have been increase in our outsourcing costs compared to the previous quarter, it has seen a rise by KRW 3.8 billion and KRW 15.5 billion increase compared to the previous year at KRW 85.5 billion. Now to our advertisement expenses. Due to more marketing activities, it has seen a rise by KRW 8.4 billion over the previous quarter. But on a Y-o-Y basis, it was a decrease by KRW 0.7 billion at KRW 19.7 billion. As for share-based compensation expenses, there was a reversal in the previous quarter, but in the third quarter, there has been a proportion of recognition amounting to KRW 7.8 billion. Right after the listing, there was a one-off expense recognition according to the share-based compensation scheme. And compared to the previous year, we have seen a decrease by KRW 62.8 billion. So in conclusion, our operating profit for Q3 has seen a change by 14% on a Q-o-Q basis. And on a Y-o-Y basis, it has seen a decrease by 28% at KRW 140.3 billion. The third quarter operating margin rate stands at 32% and as for adjusted EBITDA reflected to share-based compensation expenses, it has recorded a number of KRW 170.9 billion and the adjusted EBITDA profit rate stands at 39%. Now on our nonoperating profit and loss, while the nonoperating numbers include other losses and income and also financial losses and income. And due to the stronger dollar, we've seen a gain in foreign currency-related profit. And thus, our number recorded KRW 159.1 billion. And lastly, our net profit number. On a consolidated basis, in Q3, our net profit has reported KRW 226.4 billion. It has seen on a Q-o-Q basis, a rise of KRW 32.5 billion, thanks the increase in our nonoperating numbers. And compared to the previous year, it was an increase by KRW 48.1 billion. The net profit rate stood at 52%.

[Interpreted] This concludes our results presentation for Q3 year 2022. Now we will be entertaining your questions.

[Interpreted] [Operator Instructions] The first question will be provided by Jingu Kim from Kiwoom Securities.

[Interpreted] Yes, I have 2 questions. First is on your presales results for Callisto Protocol, what was it like? This is my first question. And my second question is related to BGMI ban. Could you please give us an update of what's happening on the ground? And when do you think things will be back to normal?

[Interpreted] Yes, on to your first question related to Callisto Protocol presales, well, we are working hard to build up the awareness of our new title. So we are also building up expectations on the -- for the target users. And as to the concrete numbers, since revealing them could be somewhat influence our marketing numbers, I am not at liberty to disclose you any number-wise information. But I can safely say that it is getting much enthusiastic response from the U.S. and European market. And on a platform basis, the focus is with PlayStation 5. So the result to State is better than our expectations. So we have high hopes for it. And now to the second question, which was on the BGMI situation, what is the current situation, what was the progress? When do we think things will be back to normal? Well, India is a very important market for KRAFTON and we'll be seeing a service ban or service hold in that important market. However, the Indian users, they are requesting unbanning of our title and they're expressing their support for our titles through various channels, including [indiscernible]. And we are doing our best to resume our services in the Indian market, and we are using various channels to communicate with the involved parties. Well, Indian market is a very important one to us, and we are going to contribute to the development of the Indian gaming industry. And as to the timing of normalization, well, I cannot give you a pinpoint data on that. But once again, we are engaging in earnest discussions with all the involved parties. And should there be much of a progress, we would be making sure to deliver the news to you.

[Interpreted] Next question, please.

[Interpreted] The following question will be presented by Dong Hwan Oh from Samsung Securities.

[Interpreted] Yes, I have 2 questions. Well, we are a month into the fourth quarter. So could you give us the directionality of your PC games and also mobile games? This is my first question. And well, also, I would like to hear something more about your Chinese operations. Well, is the influence from the Chinese government still being heavily felt? And now on your next titles, I've heard that there was stopping of your next project in the pipeline project [ FS ]. So does that mean that there will be no introduction of new titles before the mentioned Black Budget project?

[Interpreted] Yes, on your question on the directionality of our PC and mobile performances in the fourth quarter and also on the Chinese regulation. Well, as mentioned during the presentation, the fourth quarter is typically a low season and we have started our McLaren supercar collaboration. In the end of September, this collaboration work will continue in -- has continued into the month of October. And I'm not at liberty to give you much detail, but we have plans for the upcoming winter season. We are going to provide new game experiences and we're going to use the football World Cup game. So we're going to use that theme, too. And with the stronger live services, we hope to defend the revenue and traffic in the low season. Same thing can be said for the mobile platform as well. It is a low season for our mobile games as well with lower traffic compared to the previous quarters. But with an introduction of a new mode and also using the World Cup theme, we hope to defend our traffic when it comes to mobile platform. And as to the second part of your question regarding the Chinese government's influence or the regulators' influence, well, we do not directly engage in providing our services in the Chinese market and many experts say that the regulations are to remain as they are. So this is a majority view of the experts. But if you look at our results, even with the given regulatory environment, our partner companies have found clever and wise ways to provide their services in that given market. Yes. Now moving on to the line of related question. Well, the gist of the question is, I believe, is will there be new titles prior to the release of Black Budget? Well, we do mention some titles during our earnings session, but not all because some projects, they may be dropped if they do not meet the expectation -- internal expectations during the development phase. If the core gameability is not proven with the project, we could drop it. That is why we do not disclose all the projects that we are working on, but at KRAFTON, we have set up a structure of development with our independent studios and independent studios plus KRAFTON, we are working on various projects. So to the core of your question, will there be a new title before Black Budget? There could be one. And of course, you would be curious as to what kind of project it is. Well, I could say that as of today, we're working on 20-plus projects and well, I am not at liberty to disclose you any more information on them. But in 2023 earnings session, I think we will be able to give you a more clear and more tangible picture of our future lineup and the regions and platforms that we will be focusing on.

[Interpreted] Next question, please.

[Interpreted] The following question will be presented by Soyun Shin from Crédit Suisse.

[Interpreted] Yes, I have 2 questions. First is on the ex-China PUBG Mobile growth expectations. Well, compared to year 2021, we have seen a relatively weaker figure for non -- ex-China PUBG Mobile growth seen in 2022 because the pandemic situation was changed now into an endemic situation. So what would be your revenue expectation for next year when things will be more back to normal pre-pandemic? So will this segment see a stop in downward movement? Do you expect to see a rebound and another growth going into the future? This is my first question. And my second question is related to your new IP Bird That Drinks Tears. Well, in our previous earnings session, you did mention about putting together a development team. So I would like to hear about the current development status, are the graphics ready? Well, will there be a teaser release?

[Interpreted] Yes. Now on to the next part of your question, which was with PUBG global expectations for next year. Well, as was mentioned during the presentation and as you're well aware, the global gaming market has seen a decrease. And I know that the investors and analysts have concerns over this macro element. And PUBG, we have the upper edge -- relatively upper edge in the Battle Royale genre and has things bottom mapped for this genre and title. Will there be a rebound going into the future? Well, I cannot say for sure. But we have various experiences of turning things around, as you have witnessed with the PUBG PC experience and also BGMI experience. Well, even if there were temporary downward drop in terms of traffic and revenue, we successfully saw a turnaround of the situation. So we do have such experience. And as for PUBG Mobile global, we are quite proud in the originality of this type. And in the past, we try to stay away from approaches such as pay to win. So we have this basic stat in place. But going forward, we are going to think about adding more revenue efficiency to our game structure. So we're currently working on it. And compared to our competing titles, well, I know that PUBG Mobile global is a little heavy. So we are working on lightweighting the title to approach new user bases that we did not service and really serviced in the past. So in the fourth quarter, this lightweighting effort will continue in earnest. And with that, we do hope to see a turnaround and even a growth in our numbers. I guess, and to your second question, which is on Project Windless. You've asked on how the development is going. And well, you are far ahead of us because we've just recruited our executive PD and we successfully recruited the core personnel now and is working on the studio. And we've disclosed our visual concept trailer in September and received a good response according to it. And there will be an [ ARPU ] release in Korea in November this month. And we are going to work on introducing graphic novels to the global audience and it is quite a famous IP in Korea, but we have to work on enhancing global awareness of this IP. So we will be working in a transmedia way to get awareness up. And well, for [indiscernible], I think that you were asking about [indiscernible], so that would -- you would have to wait a while to see our [indiscernible].

[Interpreted] So due to time constraints, we will entertain one last question.

[Interpreted] The last question will be presented by Jae-min Ahn form NH Investment Securities.

[Interpreted] Yes. Your Callisto Protocol is soon to be launched. And what will be your marketing plans? Could you give us your expected marketing expense for Q4 and next year?

[Interpreted] Yes. Now to your question related to our marketing expense with Callisto Protocol launch. Well, we are taking a different approach as you may have felt. Well, it's not a use of existing IP. So we are going to take a different approach to it. So we're working on this state of play. Well, we will be participating in global events such as state of play and some are games fest and other important events and gatherings. And we have to enhance the target audience group of including [indiscernible]. And we want to expand this space as to include action horror users as well. So widening of the target audience is also something that is on top of our minds. And to that end, we have to enhance the awareness of Striking Distance and we would also be working with the disclosure of story trailers. And there will be a TV ads featuring the main character of this game title. And we will take the marketing in stages and according to different markets and countries. And we do get the support and help from our platform partners. So as for our marketing expense, well, on a yearly basis, we spend about mid-single digit compared to our revenue. And this execution, half of it is geared towards the fourth quarter. So we will be working with the Striking Distance TCP mostly in the fourth quarter. Yes. I am a PC game player, not much of a console player. But I'm going to buy a console set. I'm going to buy the game pack to enjoy the ultimate horror. And I hope you do so, too.

[Interpreted] This concludes the earnings session for Q3 2022. I once again thank you for taking time out of your very busy schedules. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]