NC Corporation (A036570) Earnings Call Transcript & Summary

[Interpreted] Good morning. This is Jason Lee from the IR office. Today, we are slightly going to change the way that we proceed. I will be giving the presentation. After which, we will have the Q&A session. During the Q&A session, myself and also the CFO, Mr. Yoon Jae-Soo, will participate to answer your questions. And with that, let me begin my presentation on the third quarter. Third quarter sales totaled KRW 585.2 billion, representing an increase of 47% Y-o-Y and 9% Q-o-Q. Lineage M recorded an unprecedented rebound in revenue, while PC-based Lineage I and Guild Wars 2 also outperformed expectations, driving the performance this quarter. Operating profit posted KRW 217.7 billion, a jump of 69% Y-o-Y and 4% Q-o-Q, reflecting the performance of the top line. Pretax income was KRW 212.2 billion, and net income was KRW 152.5 billion. For your information, the third quarter YTD sales is KRW 1.8548 trillion, and operating profit is KRW 668.1 billion, which means the sales up to the third quarter of this year significantly surpassed the full year sales of last year. Next, let me go over the sales of each title. Lineage M third quarter sales grew 18% Y-o-Y and 53% Q-o-Q to KRW 245.2 billion. The third quarter revenue was the highest per sales -- per quarter sales since the first quarter of 2018. In addition, the Y-o-Y and Q-o-Q growth was also the highest to date. Lineage M's third anniversary update was hugely successful. A slew of players returned to the new server, and the master server content has become a clear incentive for the top-tier user group. With this update, the company has become more confident in the long-term success of the game. And I believe it is safe to say that we and, I believe, you should look forward to the new history to be created by Lineage M. Sales for Lineage II M increased -- decreased 27% Q-o-Q to KRW 144.5 billion. As was the case with Lineage M, we are experiencing a natural decline in sales for Lineage II M the first year after the launch. However, we believe the first anniversary large-scale update on November 25 will provide an opportunity for the top line to stabilize. Over the longer term, we expect Lineage II M to become a long-running game like Lineage M and a stable cash cow for the company. PC-based Lineage I sales was up 46% quarter-over-quarter to KRW 49.9 billion. The first large-scale update in a year attracted dormant users back to the title. Continuing on the significant rebound triggered by the remaster update, we expect this year will end with strong performance similar to that of last year. Lineage II sales increased 2% quarter-on-quarter to KRW 26.3 billion. After the large-scale war content, which naturally creates in-the-field battles and conflicts between users, gain popularity, this title has been posting steady performance. The response for the update in the fourth quarter has been positive to the degree that there is a waiting line for the new server added at the end of October, which leads to expectations of solid performance for this year and next. Guild Wars 2 sales rose 20% quarter-over-quarter to KRW 18.8 billion. The main driver of growth in the previous quarter may have been COVID-19. But in this quarter, the interest is growing around the news about the expansion pack, which has increased activity on the game and boosted sales. To meet user expectations, NCWest is currently focused on the expansion pack development with the target of launching next year. There is nothing specific to mention about Blade & Soul and Aion this quarter, but there are large updates and a wide variety of in-game promotions planned for the fourth quarter to improve sales. Lastly, royalty totaled KRW 58.8 billion, a decrease of 30% Y-o-Y and 6% Q-o-Q. Next, let me talk about expenses. Third quarter operating expenses totaled KRW 367.5 billion, an increase of 37% Y-o-Y and 12% Q-o-Q. Labor costs grew 37% Y-o-Y but declined 2% Q-o-Q to KRW 159.1 billion. The Y-o-Y increase is because of an increase in head count, higher wages and an increase in incentives paid. Marketing went up 31% Y-o-Y and 130% Q-o-Q to KRW 29.7 billion. Marketing spend in the second quarter plunged temporarily due to less business activity. However, we have restarted updates and in-game promotions this quarter, which led to the increase. In the fourth quarter, we have updates planned for core games and new game launches, such as Trickster M and FUSER, which should lead to an increase in marketing cost. Variable and other costs totaled KRW 162.2 billion, up 38% Y-o-Y and 17% Q-o-Q. This ends my presentation on the third quarter performance. With the strong performance of flagship games like Lineage M, Lineage I and Guild Wars 2, the third quarter was an opportunity for the company to prove once again its capabilities in extending the MMORPG life cycle. As we accumulate more success stories, our expertise in developing and servicing MMORPG games becomes more sophisticated. Based on such capabilities, the preparation of our future pipeline continues diligently. Blade & Soul 2, which will represent NCSOFT 2021, is scheduled to launch in the first quarter and preregistration for Trickster M has exceeded our expectations. Project TL successfully completed a large-scale in-house test in the third quarter and is on the path to a PC version Korea launch for next year. Pangya M and H3 have increased the diversity of our game lineup. And over the longer term, many console games are in development to be launched on a next-generation console platform. On the other hand, overseas launch preparations are going smoothly. Lineage II M will kick it off with Taiwan in the first quarter. After which, it will expand into other markets. For Blade & Soul 2, we want to launch overseas as soon as possible. The company's early investment in AI technology have also recently led to tangible results. AI is used extensively in game development and servicing. Not limiting ourselves to this area, the company recently announced plans to launch AI-based financial services and an entertainment platform. These initiatives are for the company's longer-term version -- vision to become a more competitive technology company. Based on our core IPs and advanced technology, we will continue to exert our efforts to become one of the most competitive companies in the global market. We look forward to your interest and support in our endeavors. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Eric Cha from Goldman Sachs.

[Interpreted] There are 2 questions that I would like to ask you. The first question is that for Lineage M and Lineage II M, what would be your outlook for the sales in the fourth quarter? In addition to that, for Lineage II M, when do you think that the overall top line will start to stabilize? The second question that I would like to ask you is that during the presentation, you did mention that for Blade & Soul 2 and for the Taiwan launch of Lineage II M, you are planning it for the first quarter of next year. Would there be any possibility that this time line would be pushed back further? And if so, what would be the reasons behind such a delay? In addition to that, for Blade & Soul 2, do you have any marketing events that you are currently preparing? The last part of the second question that I would like to ask you is about your pipeline. I do understand that internally there are many projects that are ongoing that have not been shared with the market. Would there be anything that you believe would be communicated with us or disclosed to the market in the near term?

[Interpreted] So thank you for your question. Maybe I could give you a brief answer to the first question that you asked. In the case of Lineage M, if you look at the third quarter revenue, again, this is the highest per quarter revenue since the first quarter of 2018. So this is a game that is in its third year. And the fact that it can achieve such performance is something that we found to be very interesting. So as a result of that, as you already probably know, for the actual performance of our individual titles, there is some volatility according to how and how strongly we push the monetization or how we put less force behind it and also with regards to what type of updates take place in each quarter. So having said that, we also -- we do believe that the fourth quarter will be a bit weaker than the third quarter performance because the third quarter has been so strong. So as a result, we do intentionally want to pace ourselves a bit and put less emphasis behind the fourth quarter. If we talk about Lineage II M, and this is something that we have consistently said, for all of our MMORPG games, there is a general trajectory that the games show in the beginning in terms of the general moderation that we see. And as a result of that, I do believe that this game is no exception. So as a result, I think that in the fourth quarter, the overall trend will show a decline as we have seen with Lineage M. However, in the same note, we do think that for the overall stabilization, it will come near to the end of the fourth quarter. So for 2021, when you do your projections for the next year, I do think that if you take the overall revenues that we see past the fourth quarter, that, that should be the overall base case that you use for your projections. So again, for L2M, the overall stabilization, we believe, will become -- will come towards the end of the fourth quarter. To go on to the question that you asked about the schedule for Blade & Soul 2 and also for L2M Taiwan, I do believe that if we look at the overall progress to date and the reason why the overall launch schedule has been pushed back a bit, there is a very clear reason behind that. And that is because of the developments surrounding COVID-19. Because of the COVID-19 backdrop, we have been partially having some of the staff members work from home. And the regular work schedule only really started to be put in place in full from the third week of October. So as a result, in a phase in which we're -- at a stage in which we are in the last run up until the launch for this very large title, in actuality, it requires a lot of concentrated efforts between the different teams. And also, there needs to be a lot of work done in a short period of time. However, the fact that we were physically distanced from one another made such cooperation a bit difficult and challenging. So we felt that there was no need for us at this time to rush into a launch. So that is why we slightly pushed back the launch schedule. And different from times before in which there were design changes or other such reasons for us to delay the launch, I think that this is clearly a different type of situation. And for the L2M Taiwan schedule, it's for the same reasons that we just mentioned for Blade & Soul 2. So to answer your question about whether there would be further possibilities of a delay, I do think it all depends upon the external situation. Right now, again, we are working on a normal schedule with people in the offices. However, as we do enter into the winter season, there could be a resurgence of the COVID-19 situation or other external factors that may drive us to change our plans. However, as of now, internally, everything is going according to schedule. We are in the last finishing touches for the game in itself. So if there are no externalities, we do believe that we will be able to launch as planned. Another thing you also asked, whether we had any marketing plans planned for Blade & Soul 2. And in the past, if you look at what we have done, of course, we had, had physical conferences or events, which people gathered all together. And we did do intensive marketing through those opportunities. And I do believe that yourself, you have participated in these events before. However, in the current environment, we do think that such a showcase would be difficult to host. So as a result, we do have the first quarter during which we will be launching the game. And I think that as of now, we do have plans to maximize the marketing effect as much as possible but having very concentrated efforts taking place during that period of time. And as you are aware, of course, in addition to Blade & Soul 2, Aion 2 and Project TL, internally, we have a wide variety of projects that are ongoing. And so when we would actually be able to share that with you is, I think, something difficult to answer as of the current time. However, what we can say is that I do think that for next year, it is clear that we would be able to share a wide variety of games. It won't be just 1 or 2 games but a multiple number of games with you. So we would ask for your patience until then. And as you are aware, the market currently is in a time of growth. So therefore, we don't want to just depend upon our existing IP and the franchise that we have. But we do want to appeal to a new customer base, new users, through new games and new content in a new platform. So as a result of that, I do think that for next year, we will have a lot of news that we will be able to share with you.

[Interpreted] The following question will be presented by Sung Eun Kim from Macquarie.

[Interpreted] There are 2 questions that I would like to ask you. The first is that I do understand that you recently launched the classic server for Aion. And in relation to that, if you look at the overall user number trends or the matrix and also in terms of the revenue, how do you see this actually playing out? What type of trends do you notice? And the second is about Trickster M. I do believe that there's a lot of preregistration that is taking place at a very accelerated pace. For the possibility of success for this game and the actual expansion into maybe new user bases, what type of users do you think that you would be able to attract with this game?

[Interpreted] So to address your first question about the Aion classic server. Maybe before we talk about this server in itself, if you look at the third quarter and the overall performance and if you look at the PC-based games performance, for some games, for example, for Lineage II, at one time, these were games that were having trouble and were a bit weak, for example, of sales of KRW 50 billion or so. However, through various updates, as of 2020, last year, we have very strong performance from these titles. And this year, again, we also believe that it will be another very strong year. So we think that sales can go up to around KRW 100 billion. So I think that this type of rebound story is the type of power and the overall competitiveness that NC has as a company. So as a result of that, I think that we can do the same with Aion. Using the experience that we have had for the other IPs, what we have done this time around is that the classic server is actually based off of and a reinterpretation of the build that we had in April of 2009. So as a result of that, we do believe that this will appeal to a lot of dormant users and attract them back to the game. And usually, we don't share with you the various indicators that we have, but I can say that it has been very positive. So again, for Aion-based PC -- for PC-based Aion, I do think that as we have done with the Lineage franchise, we can expect a very good rebound for this game. So for Trickster M, I would have to say that this game to now is exceeding our expectations in terms of the performance. You may have seen from the press release that in terms of the preregistration overall trend, in 2 days, we hit 1 million; in over 9 days, we were able to hit 2 million. So as a result of that, this is an unprecedented level. And for us, we do find it to be very encouraging. And I do think that the reason behind this, there are probably a number of factors, but one is the overall market backdrop that we are in. So for the past 3 to 4 years, if you look at the overall mobile market, Lineage M has been leading the market in itself. And since then, there was a lot of games that hit the market in terms of being very similar in nature. So for the past 2 to 3 years, there have been people who are enjoying that type of game. And as a result of that, they have been appealing to, for example, a more mid-tier or mid-core user type. And as a result, the overall potential customer base, should we say, for the MMORPG market has expanded significantly. However, for the new users into this market, I think that if you look at what is available, the offering really hasn't fully satisfied the level of expectations that they have had. So as a result, within the MMORPG space, there has been a potential group of users that really haven't been catered to. And as a result of that, it's potential demand that we have seen there. I think that Trickster M really appeals to this type of potential user base. And as a result of that, we have had hit the nail on the spot. So for that, Blade & Soul 2 also, we think, is trying to appeal to the same type of user, which would be more of a mid-core gamer type. So looking at Trickster M, we cautiously believe that this could be a pre-indication for Blade & Soul 2.

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

[Interpreted] There are 2 questions that I would like to ask you. For Aion 2, as the overall schedule for Blade & Soul 2 has been pushed back a bit, would there be a possibility that Aion 2 also would be pushed back with regards to the overall schedule? And the second question is that the company currently is collaborating with KB Securities and also December & Co. asset management for an AI-based securities brokerage type of service. What is the current situation surrounding that project? And what is the strategy going forward?

[Interpreted] So as mentioned before, for Blade & Soul 2, right now, the schedule is the first quarter of next year. And as a result of that, for Aion 2, we also are looking at next year, and the development is taking place accordingly. Of course, if Blade & Soul 2 would be pushed back significantly, then there is a possibility that Aion 2 could also get pushed back. But since it's the first quarter, I think that Blade & Soul 2 will take place in the first quarter. And then the second half would be the timing for Aion 2. And to talk about the second question about the AI-based securities brokerage. I think that as a company, we were one of the first through this type of earnings conference call to actually mention AI and talk about AI. So in that area, this is something that we started to talk about a long time before. And as you have probably seen in the newspapers and also through media, within our organization, we actually have a very extensive AI organization that has been working on the technology for a very long period of time. So up until now, of course, a lot of the focus of development has been for AI engine that could be used in the gaming area. However -- and in actuality, we have applied the technology to various games. However, now we think it's the time to take it one step further and look into finance. And the reason why we do believe it is possible to do so is because for the level of technology in itself, for AI technology that we hold, it has been recognized by various AI professionals to be top tier and top level. So as a result, we do believe that, that has enabled us to have this type of opportunity in other forms of business. So as you have seen in the news, we do have a partnership with KB Securities that will be focused on robot advisory technology and also the NC-based -- AI technology that we have here. However, for the details about the business plan and what we want to do, I think that today is probably not the right time to do so, and we will have other opportunities in the future to talk in more detail about this in separate opportunities. However, one thing that I would like to emphasize today is that for the company and for the AI technology that we have, we don't believe that we need to limit ourselves to only games, and we do think that there will be a wide variety of applications that we would be able to enjoy. And we also think that there are many business opportunities that will open to us because of this technology. So we don't want to limit ourselves to just games or to just finance. But we do think that this is something that can be applied to a wide variety of areas. And so that's what we're looking forward to.