NC Corporation (A036570) Earnings Call Transcript & Summary

[Interpreted] Good morning. I am Jason Lee, Head of IR at Ncsoft. Thank you very much for joining the company's second quarter 2022 earnings presentation. I will begin with the highlights of the second quarter earnings. Second quarter sales was up 17% year-over-year to KRW 629.3 billion on Lineage W launch, while on a Q-on-Q basis, there was 20% decline on stabilization of Lineage W revenue. On the back of mobile game revenue growth, operating profit was up 9% year-over-year, reporting KRW 123 billion. On lower revenue and rise in marketing expense, there was 50% decline Q-on-Q. Pretax income was up 33% year-over-year and down 30% Q-on-Q to KRW 163.1 billion. Net income was up 26% year-over-year and down 29% Q-on-Q to KRW 118.7 billion. Next, I will go over the sales of each game. Sales from the major mobile games was up 35% on year to KRW 475.2 billion, while on a Q-over-Q basis, there was 26% decline. Lineage W sales were down 40% on quarter to KRW 223.6 billion. Since its release last November, we broke KRW 1 trillion in cumulative sales as of July this year. Lineage W is following the trajectory of moderation and stabilization following the steps of our previous mobile game titles, while major traffic-related indicators such as DAU and PCU continue to be quite solid. On August 10, we had a successful third update, following which we expect there to be solid performance as we enter the second half. Lineage M sales were up 5% year-on-year and 22% Q-on-Q, reporting a good performance of KRW 141.2 billion. For the fifth year anniversary update, which started from June 8, we were able to drive higher traffic from high-end users and drive many dormant users to return to the game. The fact that Lineage M is posting such a steep growth this quarter back-to-back following last quarter's trend is quite meaningful, all the more so considering that the title was launched 5 years ago. Lineage M is showing such an encouraging result, keeping its #1 domestic market position, and we expect to see solid results as we head into the second half as well. Lineage 2M was down 56% versus last year when there was Japan and Taiwan release, while falling 24% on quarter to KRW 96.2 billion. There was a natural revenue erosion with the lapse of more than 2 years since the servicing of the game in the domestic market, but we are maintaining solid traffic underpinned by loyal customer base, and we look forward to a rebound from the third year anniversary update slated for the fourth quarter. Driven by moderation of sales, Blade & Soul 2 revenue was down 42% Q-on-Q to KRW 14.2 billion. We're planning an update in time for the first year anniversary on August 24 so as to maintain a more steady top line trend going forward. Sales from 5 PC games were down 10% on-year and up 8% on quarter, reporting KRW 95.9 billion. Lineage 1 saw its traffic metrics improve on various content renewals with its sales down 2% on quarter to KRW 25.7 billion, maintaining a stable trajectory. Lineage 2 was down 4% on quarter, reporting KRW 22.6 billion in revenue. Aion sales were down 12% on quarter to KRW 14.2 billion. Blade & Soul sales came in at KRW 6.1 billion, down 13% Q-over-Q, but user retention did improve on the back of the tenth year anniversary update, and we plan to bring a more steady performance in the second half of the year. Guild Wars 2 sales were up 70% on year and 34% on quarter, reporting KRW 27.2 billion. We are seeing the impact from the third expansion pack released on February 28 come through on the revenue figures with year-over-year growth continuing for 8 consecutive quarters. Also, preparations to launch Guild Wars 2 on the Steam platform before the end of the year is also ongoing smoothly. As such, we will attempt to add new changes as we strive forward. Royalty revenue was down 16% on year and 7% on quarter, coming in at KRW 36 billion. This is due to Taiwan's Lineage M royalties and other PC and licensing game royalties declining naturally over time. Next is on the expenses. Second quarter's operating expense was up 19% on year and down 7% on quarter to KRW 506.3 billion. Labor cost was down 5% on quarter to KRW 206.6 billion with no particular items that needs to be noted. Marketing expense was up 8% on year and 44% on quarter to KRW 59.9 billion on stronger business activities across the board. Variable costs and other expenses were up 33% on-year to KRW 213 billion, driven by a rise in mobile game revenue. On a Q-over-Q basis, there was 18% decline, which reflects mobile game revenue decline. During the second quarter, we saw our core titles, including the new gen Guild Wars 2 display robust performances, yet again showcasing the company's capabilities in extending the life cycle of MMORPG. Based on these capabilities, in terms of geographical expansion, we are broadening our target markets from domestic and Asia into North America and Europe and making thorough preparations to go beyond PC and mobile to the console platform. Now for TL, we successfully ran a large-scale test this week with more than 3,000 company employees taking part in the test, building anticipation for a successful run on the global markets. We have scheduled to review TL to our global gamers in the near future, and we look forward to your interest. So stay tuned. We also have plans to launch 4 mobile games in the global market in 2023, including collecting RPG, Blade & Soul S, and an action battle royale game, Project R. There will also be subsequent launches of multitude of PC and console-based new projects starting 2024, and the development of which is taking place at full speed as we speak, which will give more depth and variety to the company's portfolio. We look forward to your support and interest in our passionate endeavors, and we hope to come back with more news to share. Thank you.

[Interpreted] The first question will be presented by Eric Cha from Goldman Sachs.

[Interpreted] I would like to ask 2 questions. First, can you provide us with an update on the time line of the TL launch? Are you still targeting to release TL within the -- before the end of this year? And also regarding how you're going to publish TL or distribute TL, have you decided on which platform you're going to use? Or any outside partners or publishers that you're going to work with? If you can't give us a specific answer to that question, can you at least provide some of your analysis on pros and cons of different options that you can take? My second question relates to Lineage W. We've seen moderation and normalization or the stabilization of the top line revenue. The information you gave us previous quarter gave us color on making projections about the Q2 trajectory. Could you also do the same for Q3 as well? Can you provide us with some color so that we can more or less have a sense as to what the Q-on-Q trend would look like in the third quarter?

[Interpreted] Thank you. I will respond. I'm CFO, Willie Hong. I will respond to your question about TL. And I will hand it over to Jason to respond to the question about Lineage W. First, you asked about the time line, the release time line for TL. And there is -- yes, has been a recent press coverage on this topic as well. At this point, we are conducting discussions to come up with the best strategic approach in terms of timing as well as the partner that we will cooperate with in bringing TL to the global market. The reason why we are highly focused on this aspect is because -- TL itself is a very important and critical title and that it's taking this domestic game, MMORPG capabilities, successfully to the global market. It's going to have a significant implication for the company. So rather than utilizing our past conventional approaches under that open innovation that we communicated in numerous times over other quarters, we would think very hard about ways to actually cooperate and bring out synergies by fully leveraging all the elements that we could leverage both internally and with the outside partners. So that's why we are very deeply thinking about the best strategic direction forward. And based upon those discussions and decisions on the strategy, we are, at this point, targeting for first half of 2023 for TL release.

[Interpreted] This is Jason. You asked about the Q3 trends for Lineage W. If -- I'm sure what the market does or the analysts do is that they look at the percent of decline from the existing or previous games, looking at Lineage M and Lineage 2M and use that percentage to project for the upcoming quarter. We've seen a certain trend up to Q3, and we think that, that trend will continue on into Q3 regarding Lineage W. But there's one thing that we need to be mindful of, which is that we've conducted an update on August 11, the Giran update, and that had bought quite positive results. We've seen the returning of the dormant users 3x higher compared to our previous update. And the paying user figure also after the Arden update in February was -- did also increase. And therefore, we believe that with the update of the game titles, we will be able to, at least, match the percentages of erosion that we've seen from other previous games, but we are expecting and we are hoping for a better performance going forward.

[Foreign Language] The next question will be presented by Jingu Kim from Securities.

[Interpreted] My first question relates, once again, to TL. What are the levels of in-game sales that you're expecting, including the items as well? And also, what's the time line like for AION 2 release? And I know it's a little far into the future, but what about Project E and other interactive movie titles. Regarding Lineage W, just a follow-up. When do you think you will start to see normalization of the daily revenue for Lineage W? And what is your schedule for release -- the second phase release into different markets? And what are your plans for adopting NFT?

[Interpreted] Yes. I will respond about the TL first and the business model that is going to be used. Of course, later on, when the time comes, we will be able to provide you with more details regarding how the portfolio of items that we will be offering. But of course, we are going to make sure that we actually really focus on pay to win to make sure that we minimize the gap across the users as much as possible. But I would also like to add that there has been changes in the overall global game market regarding the monetization models. Previously, people in North America and Europe, they were very negative and critical about the monetization BMs, but we now see a gradual acceptance. So for instance, battle passes, DLCs and in-game items even in these markets. And so these large games studios, since the development period, is very long and because development of game titles entails a significant level of investment, they also, like Ncsoft, by providing the live services would -- do wish to continuously create the revenue stream, and that has become a very important differentiating factor. So of course, we will stay away from pay to win as much as possible. However, at the meantime, strike a good balance so that we can bring about a good and robust performance from the game titles. Now regarding AION 2, yes, it is the next big thing, next big mobile MMO game that we are developing currently based on Unreal Engine 5, where we have made the decision to do a concurrent global launch across markets and across geographies. But with regards to when that specific timing is, it's too early to say. We will make sure that we set a separate opportunity to share that additional information later. Regarding Project E, what I can tell you that is that it shares the universe of TL and its backdrop is Oriental, and it is a next-generation MMO title. But once again, we would have another separate opportunity to share and reveal more information. In terms of Project M, it is being developed with console platform in mind. We've previously shared a teaser video. And as you would have seen from that video, the preparations are underway. And once again, we will be able to share with you additional information at a later date. In the normalization timing for Lineage W's revenue, if you look at Lineage M and Lineage 2M, basically, it took them a little more than 1 year to go through the downward stabilization of the top line. So if Lineage W were to follow the trajectory that had been shown by Lineage M and Lineage 2M, it will be around 1 year. So by the end of this year or beginning of next year would be that normalization timing.

[Interpreted] Now I'm the CFO to talk about that NFT related strategy. Unlike the NFT strategies of other companies, as I've mentioned before, we are not focusing on pay-to-win model at all. What we are focused on is to take that e-currency in game and make that into an NFT so that it can actually be used in the game and also be interoperable or compatible with other games outside. So as I mentioned previously, once again, the NFTs, we are not just thinking of NFT as a means of currency to purchase and sell goods in the game or the merchandise or the items and the game. What we are thinking of is much of a broader vision and more high-level approach where users, based on Web 3.0, would be able to use the NFTs and -- within the game itself as well as part of the goods that are being used within the game. And so it is -- we are thinking of it as an NFT or a crypto asset or cryptocurrency that is not just constrained within the bounds of the game itself. So right now, we're in the phase where we're implementing that strategy. At this point, we have a strong focus on the mainnet itself, how we're going to configure that mainnet? Are we going to be designing that ourselves? Or would we require cooperation from with other partners? So at this point, what's a priority for us is to find a technical solution to creating that mainnet. And so at this point, that discussion is ongoing. And once we come up with, and we are undertaking some concrete steps. And once the time comes for us to be able to share with you more information on this, we will definitely do so. Some people say that the crypto winter has come. But for us, what's important is, once again, based on the Web 3.0, for us to employ the strategy and really come up with a solution for the technical basis to all of these NFT-related endeavors and bring that technical solutions and embody that in our game strategy. I hope this answered your question. Okay. I apologize. I just want to clarify one thing, which is that it's not that we're thinking about designing the mainnet ourselves, it's what we are looking at is game system that's going to be connected to the mainnet. So let me clarify that aspect. Because mainnet, that is the very foundation, and that's a critical threshold that was why I was mentioning mainnet. Well, once again, our focus is on the game system, not on the designing of the mainnet itself. And the reason I say that is because the various different technical parameters are important. For instance, processing speed and the stability of the system itself. I wouldn't go into all the details of the technology aspect. But this is important because we are not going to just apply NFT to single game. It's actually going to be for the comprehensive game titles that we offer, which will have a strong underpinning of Web 3.0.

[Interpreted] The next question will be presented by Mike Hong from CGS CIMB.

[Interpreted] I would like to first ask you about your consolidated basis number of headcount as of the end of the second quarter. And for the TL trailer that's uploaded on your channel, it's on YouTube Studio. So I would like to understand what the user metrics trends look like? For instance, what's the viewer? How many people have viewed it? What's the time spent on viewing that video? It will be helpful if you could share with us those user-related metrics because I see that there's been 9 million views already. But the comments that's been written is only about 500. I'm asking for an insight because I think this will help us understand what the demand is going to look like going forward.