NC Corporation (A036570) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Jason Lee, Head of IR at Ncsoft. I would first like to thank everyone for taking time to participate on this earnings conference call for the fourth quarter of 2020. Let me begin my presentation with the fourth quarter earnings highlights. The fourth quarter sales totaled KRW 561.3 billion, representing an increase of 5% Y-o-Y due to the popularity of Lineage 2M. When compared to the previous quarter, sales was down 4% because of the high base effect, but revenue showed stable trends, driven by the sound performance of Lineage 2M and PC-based Aion. Operating profit posted KRW 156.7 billion, a jump of 11% Y-o-Y. In addition to the changes in the top line, certain one-off expenses, including special bonus payments, took place in the fourth quarter, leading to a decline of 28% Q-o-Q. Pretax income was KRW 119.1 billion, and net income was KRW 80.3 billion. Due to the back-to-back successes of Lineage M and now Lineage 2M, the company in 2020 was able to achieve the highest sales and operating profit in its history. Full year sales and operating profit reached KWR 2.4162 trillion and KRW 824.8 billion, respectively, representing a surge of 42% and 72% each versus the previous year. Next, let me go over the sales of each titles. Lineage M's fourth quarter sales was KRW 211.7 billion, down by 1% Y-o-Y and 14% Q-o-Q. Following the jump in sales in the third quarter, the game is now in the process of a natural stabilization. Lineage M, a game in the fourth -- in its fourth year, still maintains a solid position at the top in Korea. Going forward, the company wants to continue this growth momentum by providing services that satisfy the needs of our customers. Sales for Lineage 2M increased 16% Y-o-Y and 15% Q-o-Q to KRW 166.7 billion, achieving a meaningful result of posting the first rebound in quarterly sales since its launch. The overall user traffic improved with the first anniversary mega update on November 25, and retention has improved. Looking ahead, I believe Lineage 2M will continue to generate robust sales numbers. The 5 PC-based game sales totaled KRW 121.3 billion, which is up by 4% Y-o-Y and flat versus the previous quarter. PC-based Lineage I sales was KRW 46.8 billion, a decrease of 9% Y-o-Y and 6% Q-o-Q. There may be some ups and downs from quarter-to-quarter in the future, but we believe the title will continue to generate solid sales based on its lower user base. PC-based Lineage II sales was KRW 26 billion, a decline of 7% Y-o-Y and 1% Q-o-Q. The response to the 17th anniversary update and in-game item promotions were positive, which resulted in strong performance in 2020. Aion recorded a growth of 133% Y-o-Y and 123% Q-o-Q. With the launch of the Classic server in the fourth quarter, old loyal users returned, resulting in a significant increase in both AUs and PCUs and a big increase in the top line. The company was able to reconfirm the strength of the [ INAP ] and the market potential of PC-based MMORPG titles. Guild Wars 2 sales was KRW 14.2 billion, up 25% versus the previous quarter, but down 25% versus the -- sorry, up 25% versus the previous year, but down 25% versus the third quarter. Sales numbers were softer than the previous quarter, during which expectations peaked upon the news of the expansion pack development, but it still represented Y-o-Y growth for the second consecutive quarter. NCWest is exerting its efforts to develop an expansion pack that can satisfy user expectations and continues to explore long-term opportunities to leverage the value of the IP. Blade & Soul sales was down 13% Y-o-Y and 9% Q-o-Q. But in 2021, we are planning a wide range of changes that should create a rebound in revenue. Lastly, royalty sales totaled KRW 44.1 billion, a decline of 1% Y-o-Y and 25% Q-o-Q. Royalty for both mobile and PC-based games declined. Next, let me walk you through the full year 2020 performance by game. First, the company's mobile game sales posted explosive growth in 2020 with the launch of Lineage 2M. Mobile game sales jumped 72% Y-o-Y to KRW 1.6784 trillion, accounting for 69% of total sales. Lineage 2M set a new record of KRW 849.6 billion for the year, but I believe the fact that there was no cannibalization for Lineage M is particularly significant. Lineage 2M has broadened our customer base and has led the growth in the Korean mobile market. The sales from the 5 PC-based online games totaled KRW 459.2 billion, which is similar to the previous year. Once again, the company was able to confirm the concrete position of our long-running legacy IPs. First, for Lineage I, sales totaled KRW 175.7 billion, similar to the year before. Sales has increased 16% -- sales had increased 16% in 2019, and we have been able to maintain a solid top line after achieving that high growth. For Lineage II, sales grew 12% Y-o-Y to KRW 104.5 billion. The game exceeded the KRW 100 billion revenue mark for the first time since 2011. I believe this was due to the continued efforts of change and to provide a wide range of content. Aion and Blade & Soul decreased 1% and 14% each Y-o-Y to KRW 45.6 billion and KRW 72.2 billion, respectively, whereas Guild Wars 2 grew 4% Y-o-Y to KRW 61.2 billion. Aion and Blade & Soul sales declined versus 2019, but we will continue our efforts to transform and achieve better results. Lastly, royalty for the full year was up 10% Y-o-Y to KRW 218 billion. The growth was mostly driven by Lineage and Taiwan royalty revenue. Next, let me talk about costs. The fourth quarter operating expenses totaled KRW 404.6 billion, an increase of 3% Y-o-Y and 10% Q-o-Q. Labor costs grew 9% Y-o-Y and 16% Q-o-Q to KRW 184.9 billion. The increase was due to special year-end bonuses paid and advanced recognition of incentives related to our record-breaking performance. Marketing posted KRW 44.8 billion, an increase of 9% Y-o-Y and 15 -- 51% Q-o-Q. Updates and in-game item promotions for key titles and marketing for new game launches, including Trickster M, drove the increase. In the first quarter, again, we have new game launches scheduled, which will increase marketing spend further. Depreciation was KRW 16.7 billion, up 17% Y-o-Y and 2% Q-o-Q. And variable costs and other expenses totaled KRW 158.2 billion, a decrease of 5% Y-o-Y and 2% Q-o-Q. This concludes my presentation on the fourth quarter and full year 2020. In 2020, the company was able to achieve significant growth in key mobile games like Lineage M and Lineage 2M. At the same time, our legacy PC games were not complacent. They continue to try new things and evolve. I believe the performance in the fourth quarter and full year of 2020 is the result of the sound foundation of our legacy IPs and the relentless efforts to rise to the challenge and innovate. Thus, I am very happy to be able to share these results with everyone who has shown interest and supported the company. This is not the end, but a new beginning for our future growth. In 2021 and beyond, all employees and management at Ncsoft will strive to achieve the next level of growth for the future. In 2021, Lineage 2M will be going overseas, starting with Taiwan and Japan. Over the longer term, many of our titles will expand to the western markets so that Ncsoft can now grow Asia and emerge as a true global company. The preregistration numbers for Trickster M, which is scheduled to launch within the first quarter, has exceeded our expectations. As a more casual MMORPG than our existing lineup, we hope to gain a broader user base and top new revenue sources. The large-scale title Blade & Soul 2 is also joining the launch race, with preregistration starting next week on the 9th. In 2021, the plan is to launch not only in Korea, but if possible, also overseas. From a longer-term perspective, the company is developing multiple AAA console games to be launched for a next-generation console platform. We are preparing to expand into new territories using our strong IP portfolio. We have no doubt that our portfolio will become more diverse and deeper over time. Lastly, the company has adopted a shareholder return policy of 30% of net profits as cash dividends for the fiscal years 2019 to 2021. We will continue to establish and execute strategic projects for long-term growth to achieve the best results. We look forward to your interest and support in our endeavors. Thank you.

[Foreign Language] [Operator Instructions] The first question will be provided by Kim Jingu from KTB Investment Securities.

[Interpreted] There are two questions that I would like to ask you. First is with regards to the company's direction over the longer term in terms of your artistic platform and also in terms of applying various AR or VR technology, what would be the direction that the company wants to head? And in addition to that, with regards to your core competency development of various games, what is the growth strategy for the future? The second question that I would like to ask you is about Trickster M. You did say that you would be launching this game within the first quarter. Could you be more specific about which month you're currently looking at in terms of the timing? In addition to that, during the presentation, you did mention that the company is developing multiple AAA console games to be launched for a next-generation console platform. So could you be more specific about what type of genres you're looking at and in terms of when the actual launch timing would be for this pipeline?

[Interpreted] So thank you for the opportunity to address your questions. First, I would like to talk about UNIVERSE, which was the point of your first question. I think that this is a service offering that we have for fandom that in addition to the offline activities that they have, we want to bring this to a mobile platform, so that for K-pop fans that they have an entertainment platform that through which, they would be able to enjoy. So of course, there are similar services that already exist within the market. And I do believe that you're asking what is the point of difference or what is the competitive edge that NC would have in this area. I think that because it is an entertainment platform in terms of the content that we provide, it will be similar to others in terms of music videos, various photo shoots and also exclusive content, which would be the media services that we provide. In addition to that, there's also the networking service, which would be the links that we provide across the fans to link them together. So -- and in addition to that, for the fans themselves, they are -- there are fan-created content that would also be available on the platform. So for NC, of course, we are not a K-pop company. However, for this type of platform, there's actually a lot of technology that is required. And I do believe that this is where we differ from the others within the market space. Of course, the artists are at the core of this type of platform, and they are the most important. But for this platform to really be utilized in actuality and really take off, there's a lot of technology that you need to support this type of service. So therefore, for our company, utilizing the various technologies that we have in-house, including our AI technology and other types of technology, do believe that we can converge this technology on this platform to create a very unique type of service. In the beginning, because this is a new concept and because it's an unfamiliar service, we do think it will take time for the service to take route. But once it does, I do think that through the platform, we will be able to show where we differ from the others within the market space. In addition to that, once the service is more stabilized, what we do actually see take place is that as we have seen with the game services and the game overall operations, the users come up with various demands that they are asking for from the service or demanding from the service. So as a result, we are analyzing what their requests are and try to improve them and update them as soon as possible. And I think that in terms of this type of operation, this is an area in which we excel and which we are very competitive. So at the end of the day, we are, I guess, the best fitted to provide this type of product. And I think that there -- that is where our competitive edge lies. And to go on to the next part of your question, which was about the details of the launch schedule for Trickster M. Unfortunately, today, I won't be able to say specifically on what date of what months we'd be able to launch this game. What I can say as of now is that in the not-too-far future, we are going to embark on the marketing for that. And I think that you will be able to have a clear picture about what the schedule going forward will be. So not-too-far future is what I would like to emphasize and highlight now. But because we are on the topic of Trickster M, maybe if I share some color with you, as we have mentioned during the earnings release, we do see a very high number in terms of the preregistrations that we see. Of course, we do understand that preregistration in itself will not guarantee the success of the game. But we do think that this is a very good momentum that we are creating, surrounding the launch in itself because the overall numbers themselves are also high, which is also positive. But if we look at in more detail at the customer profiles, we do think that the customer profiles themselves provide a very meaningful insight into the type of customers that are being engaged. For example, in terms of the breakdown of the type of customer and also the ages that they represent, it is very clear that these represent users that will represent -- that will expand the existing customer base of the company. So because it's February 5 today, I think that, again, in the not-too-far future, you will be able to see an official release about the plans for Trickster M. And to move on to the last part about the next-generation console games that we are providing. Unless we actually provide you more information through a showcase or actually let you see what we're trying to develop, unfortunately, as of now, I don't think there's a lot of detail that we would be able to share. However, I think what I can say at the current time is that the number of projects that we are currently conducting or developing is not one, but it's actually a multiple number. And in addition to that, when it comes time to being able to share this with you, as a result of that, it won't be just 1 game, but it will be a multiple number of games that we will be showing you together. So for the time line in itself, I think that even if we do share with you a time line, there tends to be suspicion about whether we can stick to that time line. I think that as of now, what we can say on that point would be that it would have to be after this year. So around 2022, I think that, that would be the timing at which we would be able to accelerate the launch of more than one or a multiple number of products. If we look at the overall market space right now, with PlayStation 5 and then across the next 8 to 9 years, we do see that console games will be gaining more traction across various platforms. Multiplayer games that engage people on a network basis for a more competitive game playing in terms of the overall demand is something that continues to increase. And of course, this is an area in which we do want to be able to capture the opportunity. Because we are Ncsoft, we will always be interested in expanding our MMORPG universe. So for console, it will not be an exception. That does not mean that in terms of the genre, we will be limited to only MMORPG. So I think that it would be safe to say at the current time that we are looking into other types of genres to provide. Again, for more details about what type of games you will have and the blueprint going forward, I think that when the time is right, as we have always done, we will have a showcase through which we will be able to share this information and provide you with actual evidence about what we're trying to develop.

[Foreign Language] The next question will be presented by Eric Cha from Goldman Sachs.

[Interpreted] I also have two questions that I would like to ask you. First is that if you look at your mobile game trends in terms of the overall performance trends that we see, it seems to be that the revenue size is somewhat related to the PC IP-based games' initial revenues. And in terms of the overall trends that they show for the first year after the surge that we see following the launch, there seems to be a deep decline, after which there is a stabilization and then revenue thereafter seems to be very sound and stable. So for the Blade & Soul 2 and Aion 2, do you also believe that the revenue size and also the overall trend that we should expect from these games would be the same as what has just been mentioned? Or do you think it will be different? In the case that you do think it will be different, why do you believe that it would be different? So that's the first question. And the second question that I would like to ask you is that -- this is a topic that you already have touched upon a bit. But if you look at where the company is heading, of course, we started with PC-based online games, and then you very successfully expanded into the mobile space. And I think that the execution there is going very well. If we look at the company's future after Blade & Soul and Aion 2, where is the company heading in terms of its growth strategy? For example, should we believe that console platforms would be the growth driver the company for the longer term? And if so, in terms of the investments that you're making for this console area, for example, in terms of the R&D, would be this -- would console be the main focal point of your R&D efforts? If we are going to think about diversifying in terms of platforms, I do believe that there may be other types of competencies that the company needs to acquire to do so. So if that is the case, what is the company most specifically focusing on as of the current time? And in what areas are you investing to ensure that you do gain those competencies that you need?

[Interpreted] Thank you for your question. I think that first, to address your question about mobile games and the trends that we see going forward. I think I understand your question to be that for the games that we are launching, going forward, will we see the same trends that we have seen for Lineage M or Lineage 2M in terms of the overall size of revenue, what are our expectations. So to address your question, I think that for Blade & Soul 2, of course, as you have just mentioned, on the mobile game side, we do expect that the trend will be similar to Lineage M, in which, in the beginning, we will see a very full response in terms of the sales. And then thereafter, across maybe 4 to 5 quarters, we will see a Q-o-Q decline, after which the overall revenue will stabilize. So we do think that the overall trend in itself in terms of the overall form of how the trend will take place will be similar. However, what we can say will be different is that, as we have said during the fourth quarter, if you compare the performance of Lineage M to Lineage 2M as of the same timing, so 4, 5 months since the launch. In actuality, Lineage 2M has weathered the situation much better. So right now, we've not only stabilized at a much higher level, but we've actually been able to provide or come up with a rebound in the trend in itself. So I think that for Blade & Soul 2, though the launch is imminent, and it's around the corner, the expectation would also be the same that we would go in a similar direction, but at a better level. So I think that for the game in itself and the overall graph that we would see, we do expect it to be the same. And -- but what is more important than that in itself, and this is something that, of course, I don't want to be -- to talk about too casually, is that I think that where we feel very confident is that if we look at the performance and the expectation for our initial revenue from Blade & Soul 2 versus that of Lineage 2M, we don't think it will be a lower number. Because if we look at what we see now in terms of the customer target and the overall target customer, the overall design, we do believe that we will be successful in being able to gather the customers that we will want to target. And these are customers that are in their 20 to 30 and of a more casual user base. So for that, we do believe that they have much more higher potential. And the process that we need to embark upon at this point of time is actually converting these potential customers into real commercial customers. So that's what we want to do now. And if you look back at our track record, for example, in 2016, when we talked about the mobile market then, a lot of people said that the mobile game market was saturated. And then in 2017, we came out with Lineage M. And if you look at what's happened in the market, of course, according to the reference, the numbers can be slightly different. But on a Y-o-Y basis, the market for mobile games jumped 40% in that year. In 2020, again, we came out with Lineage 2M. And if you look at the mobile game market last year, on a Y-o-Y basis, it grew 20%. So I think that what both cases show you is that we are making the market that we are addressing. So we are the ones that are bringing in new users, we're expanding our market and creating a bigger pie for the overall growth that we see at a very high level. So of course, nothing is for sure. But what I can say as of this time is that we do think that the customer base will not overlap with the customers for Lineage 2M. And I think that these are customers that we were not able to address with the Lineage legacy. And I do think that we will be able to have very meaningful game revenues from this new title. So that would be our expectations as of the current time. To address your second question about what's the future after Blade & Soul 2 and Aion 2. I think that the way that we think about things is not because the mobile side, for example, for the various IPs that we have on the mobile, if we exhaust that, does that mean do we go over to console, that's the next step. That's not the approach that we have. Because even with the existing IPs like Blade & Soul and Aion, I still believe that from multiple different standpoints, there's still a lot of areas or territories we can expand into going forward. So even before the company actually is able to root itself as a main company in the console area, I think that before that, if we look at Blade & Soul 2, Aion 2, the successful launches are something that we need to complete. And then that would include overseas expansions for those games. And then separate from that, we do have the efforts that we continue to make on the console side. So I think that this is a different track. And as a result of that, what is meaningful for us is not how much revenue we can actually garner from the console side or how much products that we can launch on each year basis. But in actuality, the multiplayer aspect of gaming, I think and the genre in itself is something that we're very focused on because we do believe that the multiplayer characteristic in itself means that the more players you can actually garner, the better overall performance that you can see. So the more people you can gather together, the better the game play in itself will become. So for our company, of course, across the PC to mobile to now cloud and consoles and other types of platforms, we continue to expand the overall user base that we address and that we enjoy. And as a result of that, I think that the games that we're looking at now, in terms of the design are reflecting this point. So as multiplayers and consoles become the next main thing, then I think that there are areas that we will have to beef up in terms of our competencies. But on the flip side of that for other companies, also, for them to be able to service a massive multiplayer game, they also will have their own areas of weaknesses that they will need to improve themselves. So I don't think that this is something that applies to us alone. For consoles in itself, creating a game that will appeal to a mass audience and also being able to get the design right, the overall development right, this is something that we have been focused on for a couple of years now. So that has been an area in which we have continuously tried to increase our resources and strengthen. And I think that in the future, when the opportunity is right, we will have an event or a showcase type of opportunity through which we will be able to show you the type of products that we have been exerting our efforts on.

[Foreign Language] The following question will be presented by Kim Taewon from UBS Securities.

[Interpreted] The question that I would like to ask you is about Blade & Soul 2. Of course, if there is a showcase for Blade & Soul 2, I think that we would be able to see this firsthand at that time. But the question that I would like to ask you is that I think that the view of many of the market, is that for -- different from Korea, where there is a more established mobile MMORPG market, I think that the view is that in the case of North America or Japan, where console-based gaming is still the main platform, that it's difficult for an MMORPG-based -- a mobile-based MMORPG to succeed. That this is still a more niche genre within these market spaces. For Blade & Soul 2, as you have mentioned, it's a more casual game. It's also appealing to a younger user base. So do you think it has the potential to actually appeal better to the North American user market or the Japanese user market? What would be your view on that point?

[Interpreted] So thank you for the question. I think that what you have said is right on the spot, and it is something that we would agree upon. So what I'm saying is that if we look at the console-focused market for example, in the markets in which the play experience of the users is very console-centric, do we think that we can easily gain those customers and then jump into those markets and have a huge appeal to them. As of now, we don't think that it would be easy to do so. I think that if we look at the customers that we're trying to target for the mobile MMORPG market in terms of the potential customers that we would target with this game, we're not limiting ourselves to console-based players. So for the markets in which for a very long period of time, which would be the U.S. and Japan, that console play has been the main game play mode, I think that we're not trying to limit ourselves to just those players, but we do think that there are potential players of our games or potential users that are outside of that scope that enjoy casual games that are not console-based, but are engaging in role play games or more action role play games and then would like to move on to MMORPG. So there is a path of evolution that we see, should we say, taking place. So as a result of that, that is the type of potential target base that we're trying to address and trying to capture. So it would not be a person, for example, that's in the U.S. that uses their PlayStation every day and is very focused on console play. That would not be the target as of now. We do think that down the road, those are the users that we need to capture to be able to grow to the next level. But we do think it's a step-by-step process. So we don't think that we can cover all potential customer types with just one project or do this overnight. So as a result of that, we think that Blade & Soul 2 will be more like a transition. So as of the current time, we're not targeting the pure console players, should we say, with this game. But we're trying to phase in for the other type of potential players, we do believe exist within that market space. I do think that when we have a showcase, you will be able to see what we're talking about more directly for yourself. But I think that if we look outside of Korea in terms of the overall market, and if we think of the playability of arcade-based games that are out there on a customer basis, we do know that there's a very vast market there. And as mentioned before, in the U.S. and in Japan, we also believe that there's a large potential base of customers that will gradually enjoy more hard-core role-playing genres. And if we have the right product to fit those customers, I think that, that is a potential customer base for us. So when we get to that time, of course, in terms of the overall game play, game play needs to be supported by the right monetization model, which needs to be embedded into the design of the game from the beginning. So of course, we will have to have a more -- we need to have a product that will have that design, focus more on a western market feel and western market game play with monetization opportunities embedded into that altogether as one package available to just these players. But that is not going to be Blade & Soul 2. So that is not what we're hoping to achieve. But what I can say is that in addition to the existing product lineup, which we have already shared with you, as mentioned before, we still have a lot that's going on that's under the covers. And I think that once we're able to share more with you about the other games, we will be able to have more meaningful discussions about the future of the company. So as of now, what I can say is I would like for a bit more patience for the right time. So thank you for that.

[Foreign Language] The next question will be provided by Stanley Yang from JPMorgan.

[Interpreted] There are two questions that I would like to ask you. One is about your launch schedule for the future. This is something that I would like to touch upon again. But if we exclude Blade & Soul 2 and we look at Aion mobile and Project TL, when would be the expected launch timing for those games? Are there any changes in terms of the launch schedule versus what you have shared with us previously? The second question that I would like to ask you is about your labor cost for this year. How much do you actually believe it will increase? And how much headcount do you think the company will add on this year? And for your R&D resources, if we were to break it into two categories, the resources that are needed for the upgrading of existing games versus the resources that are allocated to develop new games for future pipelines, what would be the rough breakdown between the two?

[Interpreted] So thank you for your questions. I think that with regards to the pipeline going forward, the stance is not different from what we had shared previously. After Blade & Soul 2, once we see the actual results of the launch, there may be some strategic factors that we would like to take into consideration. But as of now, we don't see any changes taking place in the target. So for Blade & Soul, we have been working off of a work-at-home type of mode for the company as of now, and it has gone well. But of course, one of the variables would be how COVID-19 does play out. So if we need to, for example, shift more towards work-at-home or if there are other factors from outside that have an impact on the launch schedule, then there may be delays. But as of now, there's nothing that we have expected, and there's nothing that we foresee. If we talk about the labor cost, as you know, for the past history, the overall average has been at around 10% in terms of the headcount increase Y-o-Y. If we look at last year, because we have seen explosive growth taking place at the company, it was slightly above 10%. But for this year, the expectation as of now would be a high single-digit number. So closer to what we have seen in the past. So that's the expectation there. And then for the breakdown of our R&D resources, of course, this is not something that we can share in terms of a clear number with you. But it's always been that we have allocated a much larger portion of our resources to the new game pipeline. So if we compare the existing game resources that we have versus the amount that we allocate for new games, because we do have multiple projects going on, not only in the mobile area, but for also the console and other areas, it's a much larger majority of people that are allocated for the development of new games.