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

[Interpreted] Good afternoon. This is Sophie Lee from KRAFTON's IR team. Thank you to all investors and analysts joining us from home and abroad for being with us today on today's Q2 2026 Earnings Call. With me today are CEO Changhan Kim and CFO Dongkeun Bae. For the convenience of our investors joining from home and abroad, the CEO highlights and financial results will be presented through simultaneous interpretation, and the Q&A that follows will be conducted through consecutive interpretation. Today's results are based on preliminary consolidated figures under K-IFRS and may be subject to change following the external auditor's review. Now let me turn things over to our CEO, Changhan Kim, for the CEO highlights.

[Interpreted] Good afternoon. This is Changhan Kim, CEO of KRAFTON. Thank you, everyone, for joining KRAFTON's Q2 and First Half 2026 Earnings Call, both here in Korea and from abroad. In Q2 2026, we proved the strength of our core IPs and moved into full execution of our franchise IP-based growth framework. First, our PUBG franchise is expanding beyond a single battle royale game into a platform that brings together diverse gameplay and content. In Q2, PUBG PC energized its core fan base through well-crafted game modes, and we saw firsthand that high-quality content can translate directly into user growth and revenue. In Q3, we'll expand the UGC ecosystem on mobile, further refining the model that we've already validated. On the new franchise IP front, the early performance of Subnautica 2's Early Access launch confirmed both our scale-up capabilities and its potential to become our second franchise IP. Subnautica 2 delivered a highly successful Early Access launch, both in terms of numbers and user response. This tells us that Subnautica is a franchise IP with a strong fan base and real global growth potential. Going forward, we'll continue to prioritize community trust and game quality, maintaining stable service through to the full launch. At the same time, we'll continue to scale the Subnautica IP with a long-term perspective. Under our five-year growth plan centered on securing franchise IPs, we'll further strengthen our repeatable growth system for acquiring and nurturing franchise IPs, building on the experience and decision-making capabilities gained through this launch. Let me first dive into our PUBG franchise. In Q2, the PUBG franchise once again confirmed the structural effect of content platformization in driving both user and revenue growth. PUBG PC re-energized its core fan base and drove traffic growth through the ZIN: OP Point and PAYDAY-themed modes. ZIN: OP Point drove a sustained increase in traffic and user engagement well beyond the initial launch spike, and the PAYDAY collaboration validated the same effect. On monetization, we expanded revenue through strategic collaborations that paired existing content with proven IPs. Thanks to this content platformization effect, Q2 PUBG PC and Console MAU grew more than 20% year over year, and revenue grew more than 70% over the same period. In Q3, we'll take our mobile UGC ecosystem a step further. Since launching World of Wonder in 2023, PUBG Mobile has steadily expanded its creator base and in-game ecosystem. To date, cumulative user-created maps have surpassed 5.4 million, with more than 33 billion matches played, establishing a solid foundation for the UGC ecosystem. In Q3, we'll upgrade our creation tools and expand global IP collaborations and creator monetization opportunities. We'll offer users new experiences creating and playing content using global IPs, and combine in-game purchases with creator rewards to build a growth structure where creator participation drives both content supply and playtime. Next, let me turn to our new franchise IP. Subnautica 2, which we launched on May 15, had a successful Early Access debut and is growing into our second franchise IP. Subnautica 2 has recorded cumulative sales of 5 million units and maintained a "Very Positive" rating on Steam, turning high anticipation from its core fan base into a global hit. In particular, its co-op content confirmed the potential to expand beyond the existing fan base to new user groups. This stems from our success in identifying an IP with a strong genre moat and scaling it up by expanding co-op gameplay and content volume while preserving the core gameplay of the original. Going forward, through the full launch, we'll prioritize game quality and community trust while also shaping our franchise expansion direction from a long-term product lifecycle perspective. In August at Gamescom, we will unveil five new titles targeting launch by 2027 and begin full-scale market validation of the investments we've built up over time. First, PUBG Studios will unveil, for the first time at Gamescom, a new project built on the PUBG franchise with a new setting and gameplay. NOLA is an immersive open-world FPS RPG being developed by Neon Giant, where players can complete missions in their own way through stealth, direct assault, and a variety of tools, targeting core Western gamers. Project Zeta is a multi-team tactical arena game where four teams compete on a single battlefield. We will validate its live-service scalability through Open Development and Early Access. Twisters is a two-player puzzle adventure for families and friends. The Unbound is an isometric action RPG combining Eastern fantasy with action combat. Through these titles, we will explore the market potential of co-op games and differentiated action RPGs, respectively. Through PUBG and Subnautica, we've built multiple growth pillars based on franchise IPs. Going forward, we'll increase our strategic focus on core IPs and secure new franchise IPs through a repeatable growth system of discovering, validating, and scaling IPs. That concludes my presentation. Thank you.

[Interpreted] Next, our CFO, Dongkeun Bae, will walk us through Q2 and first half 2026 financial results.

Good afternoon. This is Dongkeun Bae, CFO of KRAFTON. In the first half of 2026, we posted revenue of KRW 2,661.6 billion and operating profit of KRW 972.5 billion, our highest-ever half-year revenue and operating profit. First-half revenue grew 73% year-over-year on PUBG franchise growth and Subnautica 2's early access launch, and operating profit reached 92% of full-year 2025 total. PUBG franchise expanded in traffic and paying user base with revenue up 25% year-over-year, putting us on track for our double-digit annual growth target. Subnautica 2 surpassed 5 million units sold within 22 days of its May 15 launch, a top-tier debut among major global hits. It also boosted sales of the legacy titles, Subnautica 1 and Below Zero, both about 10 years old, bringing in roughly KRW 42 billion, showing the IPS's lasting earning power. We'll keep driving Subnautica's long-term success through stable service and ongoing updates. Next, platform and other revenue. Q2 PC revenue was KRW 560.4 billion, up 155% year-over-year and 54% quarter-over-quarter. PUBG PC grew sharply year-over-year, thanks to positive user response to both the Seller Blade Eve Contender collaboration and the black market. With Subnautica's launch also factored in, PC revenue topped KRW 500 billion in a single quarter for the first time ever. First half PC revenue came to KRW 924.2 billion, up 70% from the first half of 2025. Q2 mobile revenue was KRW 451 billion, up 5% year-over-year, down 36% quarter-over-quarter. The drop was seasonal, but the new XU Phoenix hit record single-day revenue, driving year-over-year growth for both PUBG Mobile and BGMI. First-half mobile revenue came to KRW 1,153.7 billion, up 20% from the first half of 2025. Q2 Console revenue was KRW 23.8 billion, up 143% year-over-year and 72% quarter-over-quarter, reflecting console sales of Subnautica 2. First half console revenue came to KRW 37.7 billion, up 65% from the first half of 2025. Q2 other revenue was KRW 255 billion, including KRW 240.5 billion from ADK's advertisement and content business. First half other revenue totaled KRW 546 billion. Next, PUBG franchise Q3 content. In Q3, the PUBG franchise keeps growing on 2 pillars: IP collaborations and UGC expansion. First, on IP collaborations. PUBG Mobile and BGMI are running their biggest collaborations yet with a globally popular anime IP No. Beyond simple skins, we've built the original locations, combat, and BOS battles right into Battle Royal where our users are used to. PUBG PC is also running its first global anime collaboration this year. Following cars and K-pop artists, we are now expanding into anime, broadening our reach across global fandoms. PUBG Mobile and BJMI are also running their first-ever Ferrari collaboration. 4 signature models, custom looks, in-game items, and a new brand experience for users. On the UGC side, we will build on World of Wonder with stronger creation tools and monetization. We'll upgrade WOW's creation tools, bring Naruto and Spider-Man collaborations into WOW content, and let users create and play with global IPs. We'll also roll out World of Wonder tokens, expanding purchase and creator monetization options step by step. Next, I'll explain Q2's key operating expenses. Labor costs came to KRW 237.4 billion, up year-over-year on ADKs' consolidation and down 14% quarter-over-quarter, reflecting the base effect of Q1 severance payments. A fees and cost of revenue came to KRW 166.5 billion, up both year-over-year and quarter-over-quarter, driven by the early access launch of Subnautica 2 and revenue growth in PUBG PC, both of which we self-published. Paid commission came to KRW 342.5 billion, up year-over-year on ADK's consolidation and up quarter-over-quarter on production costs and esports. Marketing expense came to KRW 44.9 billion, up year-over-year on Neptune's consolidation. Q2 operating profit was KRW 410.9 billion, up 67% year-over-year. First-half operating profit was KRW 972.5 billion, up 38% from the first half of 2025. Turning to nonoperating items. Q2 posted a loss of KRW 316.7 billion, reflecting expenses related to unknown worlds. As a result, Q2 posted a net loss of KRW 29.9 billion, while first-half net profit reached KRW 484.2 billion, up 25% from the first half of 2025. Finally, shareholder returns. First, what we've done in the first half of 2026. We completed KRW 300 billion in share buybacks and KRW 99.6 billion in capital reduction dividends, totaling KRW 399.6 billion, up 23% from all of 2025. As for share retirement, we retired KRW 336.2 billion worth of shares on April 27, combining newly acquired and existing treasury shares. The Board also approved today the retirement of the KRW 95.3 billion in treasury shares acquired during Q2. That brings total share retirement this year to KRW 431.5 billion, representing 3.5% of shares outstanding. Next, our Q3 plan. The Board believes our share price remains undervalued and has approved the acquisition of an additional KRW 100 billion in treasury shares, which will be retired in full. As outlined in our three-year shareholder return policy, we're also considering additional acquisitions above KRW 700 billion, to be executed flexibly depending on market conditions and fully retired once acquired. That concludes my presentation. Thank you.[Foreign Language]

[Interpreted] We will now begin the Q&A session. [Operator Instructions] The first question will be from Eric Cha of Goldman Sachs.

[Interpreted] My first question is regarding PUBG PC and its well-made modes. I can see that these well-made modes are delivering very favorable performance. Could you provide more color on the update schedule for additional well-made modes and the overall direction planned for the second half of the year? My second question is regarding PUBG Mobile and World of Wonder, or WOW mode. Could you provide more color on the metrics that have been impacted by the introduction of WOW and whether there were any notable drivers of user engagement? I would also appreciate more detail on the tokens introduced to the game and how you expect they will impact the ecosystem.

[Interpreted] Regarding your first question on the well-made modes, ZIN: OP Point received a very positive response, and so we are preparing another version of that mode after seeing the impact on metrics. We are also considering making it a permanent game mode. In the second half of this year, we also have two modes scheduled for release, and in 2027 and 2028, we plan to launch multiple new modes that are currently under development.

[Interpreted] The CEO answered the first question; this is the CFO, and I'll answer your second question. Although we're unable to disclose detailed metrics regarding World of Wonder or WOW, we can speak to the regions that KRAFTON services directly, namely PUBG Mobile Korea and Japan. For the UGC mode, the engagement rate, or total time spent, is in the mid-teens, and for Classic Battle Royale, 20% of total time spent is attributable to that mode, so we have confirmed that even aside from Classic Battle Royale, there is some meaningful consumption and appeal for other bullets. So for UGC Mode, we plan to sequentially update collaborations with well-known and popular IPs like Brain mode and new maps, and also new monetization methods to drive up total time spent and also enhance the inflow of new users. Regarding the WOW tokens, we aimed to make in-map item purchases possible so that users would be able to purchase directly from the map the creations of the creators, and we aim to create a virtuous cycle that runs between consumption, repeat play, and monetization. So we are early in the stages on the road to monetization, and that is why, rather than focus on short-term returns, we are going to prioritize expanding on the creator ecosystem and also driving up user time spent. And we plan to operate this separately from the existing Battle World Tens that we have in the game.

The next question will be from Chung Eui-Sun of Hyundai Motor Securities.

[Interpreted]. My first question is in regard to Subnautica 2. Could you provide more color on any future plans regarding Subnautica 2? Specifically, I would like to know the timeline for a full launch and also any plans meant to scale up Subnautica 2 into a franchise IP. My second question is in regard to PUBG Ally. I have seen videos of PUBG Ally, and I believe that user feedback was that the Ally would add a very interesting element to the game. Could you share any specific indicators that we can use to assess the impact of the Ally on the game? And also, could you share any future update plans for PUBG Ally? I would also like to know whether the goal of this AI research and development is for profitability and monetization or perhaps to drive traffic up. So if you could provide more color on future plans, I would very much appreciate it. My next question is in regard to talent recruitment for affiliates and subsidiaries. Today, I noticed the news that you have released a new voice LLM model. Could you share any achievements in the area of AI research? And also, do you plan to have any further investments in the domain?