NC Corporation (A036570) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Jason Lee, Head of IR at NCSOFT. I would like to thank everyone for taking the time to participate on this earnings conference call for the second quarter 2021. Let me start my presentation with the second quarter earnings highlights. Second quarter sales totaled KRW 538.5 billion, representing an increase of 5% versus the previous quarter, driven by the solid performance from Lineage 2M overseas. The top line number is similar when compared to the same period last year. Operating profit posted KRW 112.8 billion, an increase of 99% quarter-over-quarter due to the absence of one-off labor costs. On a Y-o-Y basis, operating profit decreased 46% because of key operating expenses such as labor cost and marketing increasing. Pretax income was KRW 123 billion, up by 33% Q-o-Q but down 43% Y-o-Y. And net income was KRW 94.3 billion, up by 18% Q-o-Q but down by 40% Y-o-Y. Next, let me go over the sales of each game. Lineage M sales was KRW 134.2 billion, a decrease of 22% quarter-over-quarter and 16% year-over-year as the company moderated promotional activities prior to the large-scale update for the fourth anniversary of the game. Those sales weakened. Traffic indicators remain solid. Following the July 7 fourth anniversary update, dormant users have been returning, leading to a rebound in both traffic and sales. Going forward, we will try to ensure that the current stable revenue trends and robust traffic indicators continue. Lineage 2M posted KRW 218 billion, higher by 43% quarter-over-quarter and 11% year-over-year as the launched overseas was included in full for the quarter. Reflecting on our experience in Korea, we upgraded the services for Japan and Taiwan, which has resulted in steady sales exceeding our expectations. In particular, both Lineage M and Lineage 2M in Taiwan are positioned at the top of the chart. Moreover, the company is planning to expand to the U.S. and European markets within the year. In Korea, sales softened as we adjusted the level of in-game item promotions, but traffic remains intact. The sales of 5 PC online games combined was KRW 106 billion, down by 18% quarter-over-quarter but up 2% year-over-year. Lineage I sales was KRW 36.4 billion, a decline of 26% Q-o-Q but an increase of 6% Y-o-Y. Thanks to its highly loyal user base, we believe the title will record another year of stable performance in 2021. Lineage II sales was KRW 24.2 billion, a decline of 8% Q-o-Q and 6% Y-o-Y. Lineage II has firmly positioned itself as a game in which players can enjoy active interaction via world siege warfare. The game has posted very stable sales performance each quarter from the second quarter of 2019 to the current second quarter. Aion recorded KRW 19.5 billion, a decline of 17% Q-o-Q but jump of 138% Y-o-Y. The game's performance is showing a natural decline after the first quarter, during which the graphics of our launch was recognized in full. But nevertheless, the game is still maintaining significant growth versus last year. Guild Wars 2 sales was KRW 16 billion, weaker 2% Q-o-Q but up by 2% Y-o-Y. The presales of the third expansion pack that is to be launched in February next year has started, and we are planning to conduct a better test from August. The response from local press and game communities on the expansion pack has been positive, and we look forward to a meaningful rebound in the beginning of next year. Blade & Soul ended at KRW 9.8 billion, a decrease of 30% Q-o-Q and 50% Y-o-Y. Lastly, royalty totaled KRW 42.8 billion, a decrease of 6% Q-o-Q and 31% Y-o-Y. Even with the launch of Lineage 2M in Taiwan, Lineage M's Taiwan royalty increased slightly quarter-over-quarter, which shows that the company has successfully broadened its revenue base without any cannibalization of its existing game in Taiwan like it has done before in Korea. Next, let me talk about expenses. The second quarter operating expenses totaled KRW 425.8 billion, a decrease of 7% versus the previous quarter but up by 29% Y-o-Y. To walk through the line items, labor cost was KRW 186 billion, down by 20% versus the previous quarter but higher by 15% year-over-year. One-off factors such as regular incentives and special bonuses, which were included in the first quarter, were absent. But when compared to last year, the effects of an increase in headcount and higher salaries for all employees was included. Marketing was KRW 55.6 billion, up by 1% Q-o-Q and 331% Y-o-Y as advertising related to multiple new game launches in Korea and abroad continue. Variable costs and other expenses totaled KRW 160.7 billion, higher by 9% Q-o-Q and 16% Y-o-Y. So this ends my presentation on the second quarter, and let me go over a few other items. As the company announced recently, Blade & Soul 2 is scheduled to launch on August 26. Preregistration ended up to total of 7.46 million users, which surpasses the record set by Lineage 2M. With the unique features of Blade & Soul IP, which would be oriental, more action-based MMORPG, we expect Blade & Soul 2 to significantly broaden our customer base. And this morning, the company released a teaser for a new project, Lineage W. Lineage W is a large-scale MMORPG that we have been preparing for a very long period of time, with the goal of showing users around the world, the essence of a true MMORPG. It is a game that embodies the technical expertise and know-how of NCSOFT. As our first full-blown step on the global stage, Lineage W is planning a simultaneous global launch, which will include Korea, within the year. More details about the game will be announced during the August 19 showcase, and we look forward to your interest in that event. In addition to Lineage W, the development of Aion 2 and TL is going smoothly with the aim of expanding our global user base. The company also has multiple projects targeting a global audience in its pipeline. Through a broader variety of games, NCSOFT will continue to grow as one of the top companies in the global game market, and we look forward to your interest and support in our endeavors. Thank you.

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

[Interpreted] There are 2 questions that I would like to ask you. The first is Lineage W is something that was just announced, and you said that there would be a showcase on August 19. For a game that is just being opened up to the market for the first time, I do believe that the showcase is taking place at a very early time. So you did mention during your presentation that it would be launched within the year, but could you provide more specificity with regards to when the timing would be, in what areas and what the expected revenue would be for this game by the company? In addition to that, you also mentioned during the presentation that this was a game that you had developed for a long period of time. So when did that development actually start? In addition, if you look at the market reaction, maybe it's because the game has the Lineage name attached to it, but I do believe that in terms of expectation, the market seems a bit unsure about how to react. So if you could maybe provide some more detail about the game, I do believe that, that would be appreciated. The second question I would like to ask you is about Blade & Soul 2. Most recently, there was an influencer that actually talked about the game, and there was mentioned that very different from the past that the overall business model for this game would be very different. So could you provide more detail about the actual business model for this game and also the expected revenue that you believe can be generated? For the actual expectations on the revenue side, if you could compare that to maybe the recent performance of Odin or maybe Lineage 2M in its first year, that would also be appreciated.

[Interpreted] So thank you for your questions. It does seem that you have a lot of questions that you would like to ask. As mentioned before, during August -- on August 19, there will be an online showcase for Lineage M. And during that event, we will be providing a lot of detail and a lot of information about this game. But maybe just briefly to go over the questions that you have asked. For Lineage W, as the name indicates, the letter W, this is a Lineage game that we have been developing to target the global market. In terms of when we actually started the development, I believe you may recall that during the beginning of the year when we had a conference call, I had mentioned that for this year, there would be a possibility that we would launch not one, but many or multiple number of games. And when I made that comment, actually, Lineage W was one of the games that was in consideration. So if we look at Lineage W, 2 -- Lineage M and Lineage 2M, I do believe that it's safe to say that we have been able to dominate the mobile market in Korea. So Lineage M would -- Lineage W would be the next step, which would be to target the overseas market. And we're looking at a wide variety of approaches that we would like to maybe try and adopt. So for the global market as a whole, we do understand that in the past, there was limitations that the original Lineage had brought and also the original business model. So we have tried to revamp the overall content and redesign the content for this game. And as a result of that, the launch will take place, not only in Korea, but globally on a simultaneous basis. If we go back to 2015 and 2016 when we were developing the original Lineage M and developing the overall -- catering to a more mobile era, at that time, there were aspects of the game that we wanted to adopt, but were not able to do so because of business reasons and also because of the technical environment in which the game would be operated. So though we did come out with the Lineage-based games, at that time, I do believe that there were areas in which we felt were not complete, and we wanted to rather make whole. So as a result of that, I do think it's safe to say that immediately following the launch of Lineage M is when we embarked on the development of Lineage W. So at the time, again, we did -- and we're able to dominate and enjoy a very strong market share in the mobile market through Lineage M and Lineage 2M. And at the time, when we were launching these games, that was our strategic target. So for Lineage M and Lineage 2M for the overall content and the business model, we had used a verified track record-based success model that we have had and applied these to this game. And as a result, these 2 games were very successful in Korea. However, at the same time, we were well aware that because of those elements, that success that enabled us to be successful in Korea, there were limitations in global expansion using those games. So you can see that Lineage W is a reflection of that need that we wanted to sell. And in terms of our expectations for the game, I don't believe that maybe talking about it today would actually give you the feeling that we have for this game. So therefore, I think that during the showcase on the 19th, once you see it for yourselves, you will be able to understand where we are coming from with the confidence that we feel. And added to that, I think that we can safely say that the overall expectations that we have for this game are very large. However, for more details, again, you will have to wait until August 19. And once you see it, I do believe that you will share our confidence. And to move on to your second question about Blade & Soul and the overall business model that we will be using. If you look at the recent market on the mobile side, you can see that recently, there has been a lot of success in the MMORPG space. And I do think that this reconfirms the fact that there is a lot of pent-up demand within this area. So up until now, it had only been us and with our games through which we have proved that this is a demand and potential that exists within the market. But recently, with the entrance of other titles, I think that we have been able to show that this is not something that we only are talking about, but that actually exists with regards to the huge potential that this market has to actually take off in a very significant manner. For Blade & Soul 2, I do think it has its own points of differentiation, which are proven through the fact that we have very robust pre-registration numbers. And I think the question that you're asking is how are we going to actually utilize this traffic for the business model in itself. If you look at the characteristics of the Blade & Soul IP, and this goes back to when the game started on the PC base, there are specific characteristics that the player base have been showing. And this is something that we have actually reflected in terms of the overall design of the game, whether it be on the content side or on the business model side. So for example, we have and are trying to cater to a very broad user base. So from the light users are all down to the very hardcore users, we are trying to have a breadth in terms of the business model and a balance that would be able to cater to all the needs of this very wide potential customer base. We don't believe that just catering to or targeting the hardcore users itself would be a factor of success in driving very significant revenue numbers. So as a result of that, the overall business model that we are trying to achieve is one that has more balance. And I do think that for more details about that, this is something that you will have available to you, upcoming to the launch. So for this business model, it's more predefined in a very segmented manner. And I think that as a result of that, in terms of the overall revenue and the expectations that we have accordingly, that what we could say that from the market side, I do think that there's a lot of discussion and there is a lot of expectations that it would be able to reach Lineage 2M levels. And I think that the overall target that we have as of the current time is to be at the launch time, close to that level in terms of the overall revenue number.

[Foreign Language] The following question will be presented by Kim Jingu for KTB Investment & Securities.

[Interpreted] There are 2 questions that I would like to ask you. The first is that in the end of June, there was a competitive -- or competing game that was launched by another company. And as a result of that, if you look at the ranking of Lineage M and Lineage 2M, it has been pushed down a bit. So if you look at the actual daily average revenue for Lineage M and Lineage 2M at this point of time, would you be able to share what those revenue numbers are like? The second question I would like to ask you is about your new game lineup going forward. So after Blade & Soul 2 is launched, there is probably Aion 2 and Project TL in the pipeline. In terms of specific launch timing, would you be able to pinpoint the actual quarters during which you're planning to launch these games?

[Interpreted] So maybe to address your first question. You did mention that the ranking of Lineage M and Lineage 2M has gone down a bit because of the launch of a competitive game within the market. Of course, if you would compare a game that's in its fifth year of operations and has very stable revenue, with the game that has just been launched into the market and is at the very beginning of its life cycle, of course, the newer game would have a higher revenue. However, I think that if you look at Lineage M in itself, as you are aware, during this period of time, we did have the July 7 update. And as a result, if you actually look at the impact on the revenue of Lineage M, there was not really an impact that we would be -- we were able to identify. Rather, our point of concern was coming from whether the promotion this year would be able to generate or maybe in terms of the overall growth that we saw versus that of the promotion that we conducted last year, what the overall performance would be was more of the point of our attention. If we move on to Lineage 2M. It is true that there was more of a revenue impact there, and that is because there is similarities between the new game launched into the market and Lineage 2M in terms of being a 3D MMO-based game. However, that have been said, we do still see that for whether it be Lineage M or Lineage 2M across the board of those 2 games, the overall traffic is still very solid. And in terms of the overall revenue, we are looking at ways to utilize this overall traffic to apply various business models to be able to continue the momentum that we see. So in short, I think that it's safe to say that, again, for Lineage M, no impact there. For Lineage 2M, there was somewhat -- there was some impact, but the overall traffic numbers for both games together are still very solid. And in July, we've actually seen a rebound take place. So based upon that, we do want to continue the very sound momentum that we see going forward. And you talked about the pipeline after Blade & Soul 2. So what we have already disclosed to the market would be Aion 2 and TL. However, what is very important is that with Aion 2, I think that the overall direction that we're heading is showing somewhat of a shift. So as a result, if you look at the game development going forward, we're trying to develop games that are optimized in terms of gearing and catering to the global user base and the success of that user base. So that would be the priority that we have for anything that comes going forward. So in the pipeline in itself, we have 10-something games, as you are aware of. And in terms of the content of those games, the business model and overall level of difficulty that we see play, this is all putting into mind what would appeal to a global market, and we're trying to optimize it accordingly. So catering to the global market is the top priority that we have for everything that's in the pipeline. And different from other companies, as you are probably aware, we don't announce and we don't share with you everything that we have in our development pipeline from the very beginning of development. So as a result of that, what you see from the outside may seem less, but please be rest assured that we do have a very robust pipeline. So to go over the pipeline once again. For Lineage W, that is targeting within the year for the launch. And then for Aion 2 and TL, these both will be coming next year. In addition to that, in the future time, we may have an opportunity to also share with you other things that we have in our pipeline. But once again, Blade & Soul 2, Lineage W, Aion 2 and Project TL, all 4 of these titles will be coming in this year and next.

[Foreign Language] The following question will be presented by Stanley Yang from JPMorgan.

[Interpreted] You first said that the way that the company shares information about new title development is different from that of other companies. If you look at why companies actually share information early on in the development phase is to actually increase and create momentum or expectations about the game within the user base, and it's a way of marketing for the game. And I think that this is a approach that is frequently used a lot by the global game developers. So for Lineage W, you did say that you are targeting a launch within the year. And without such a process, I do think that maybe the company doesn't have enough time to actually build the momentum or build the expectations behind this game that it might need. So what would you say about that type of comment about not having enough time to create momentum? And in terms of the overall marketing strategy, what is the strategy that the company is thinking about for this game? In addition, you also mentioned that for Project TL and for Aion 2 that these will be games -- these games will be launched next year. If that launch does take place next year, would that be Korea first and then maybe other areas coming later? Or would it also be a global simultaneous launch?