NC Corporation (A036570) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and good evening. Thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2022 third quarter earnings results by NCSOFT. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation by NCSOFT.

[Interpreted] Good morning, and hello, I'm Jason Lee, Head of IR at NCSOFT. Thank you for joining the company's Q3 2022 earnings presentation. I will begin with the highlights of the third quarter earnings. Q3 sales was up 21% year-over-year, reporting KRW 604.2 billion, but was down 4% Q-on-Q. Operating profit was up 50% year-over-year and 17% Q-on-Q, reporting KRW 144.4 billion on the back of higher sales and decline in marketing spend. Pretax income was up 98% on year and 54% on quarter to KRW 250.4 billion. Net income was KRW 182.1 billion, up 83% on year and 53% on quarter. Next, I will go over sales for each game. Sales from major mobile games was up 32% year-over-year but down 8% on quarter, reporting KRW 437.3 billion. Lineage W was down 12% Q-on-Q, reporting KRW 197.1 billion in revenue. As Berserk IP collaboration and Giran updates were well received, Lineage W stabilization and moderation trend eased, driving the performance above expectations. First year anniversary large-scale update released in November 2 was also successful, boding well for solid earnings going forward. Lineage M was up 4% Q-on-Q to KRW 146.5 billion. Since the beginning of the year, we started offering content that supported user return and growth. As a result, user purchases were naturally activated, driving sales growth for 3 consecutive quarters this year. And we plan to continue such an uptrend through the offering of various different services that help extend the game's life cycle. Lineage 2M will release its third year anniversary update in Q4, ahead of which we made adjustments in the level of business activities. So for this quarter, the revenue was down 11% on quarter, reporting KRW 85.6 billion. We will endeavor to further enhance our business performance through the third year anniversary update in the fourth quarter. Blade & Soul 2, on the back of moderation in sales, was down 43% on quarter, reporting KRW 8.1 billion, while we expect to drive a rebound in sales by launching in the Taiwanese market Q1 of next year. Sales from 5 PC games were down 4% year-over-year but up 1% Q-on-Q to KRW 97.1 billion, while Lineage was down 1% Q-on-Q to KRW 25.5 billion, sustaining a steady top line trend. Lineage 2 was up 3% Q-on-Q, reporting KRW 23.4 billion. On the back of the traffic server update, AION sales was up 23% Q-on-Q to KRW 17.5 billion. Aion Classic will continue such a positive trend through large-scale update, including opening of new servers and adoption of new occupations in the fourth quarter. Blade & Soul was down 4% Q-on-Q, reporting KRW 5.9 billion. Guild Wars 2 sales were up 29% year-over-year but down 9% on quarter, reporting KRW 24.8 billion. Despite it being 10 years into its release, there was year-over-year growth for 9 consecutive quarters with its IP value as a core MMORPG title gaining recognition in the Western market. Lastly, royalty revenue was up 6% on year and 20% on quarter, reaching KRW 43.3 billion. On the back of updates, Lineage M royalties saw a large increase Q-over-Q. Next is on the expense. Q3 operating expense was up 14% year-over-year but down 9% Q-on-Q to KRW 459.8 billion. To walk through each of the expense items, labor cost was down 8% Q-on-Q to KRW 189.7 billion on lower welfare benefit expenses and adjustments in the size of performance-tied, long-term incentive booked. Marketing was down 35% Q-on-Q to KRW 38.9 billion as updates and marketing for new titles will be focused in the fourth quarter. Variable costs and other expenses were down 4% Q-on-Q, coming in at KRW 204.5 billion due to a decline in mobile game sales. In an ever uncertain environment this quarter, Lineage M continued its grip on #1 position in the domestic mobile game market, while Lineage W outperformed expectations, attesting to the strong fundamentals of our key lineup overachieving market expectations. Upon such robust fundamentals, we plan to showcase ample number of new titles so as to drive growth going forward. In the near future, we plan to hold an unveiling event to bring the most anticipated title of 2023, which is TL, to the global gamers. This will signal the start of the marketing campaign, and we look forward to your interest and support for TL as we will be showcasing the game through a variety of different channels. We are on a smooth sail, making preparations for release of many mobile game titles. Collectible RPG Blade & Soul S and action PvP brawl action game, Project R and PUZZUP, a puzzle game, are gearing up for a global release in 2023. We are also working on Project G, which is a AAA mobile game in the pipeline for a global release in 2023, and details will be unveiled early next year. Lastly, we are actively working on developing new AAA IPs to showcase them across global console and PC platform. One such new project is LLL, slated for release in November 14. So please stay tuned. We, at NCSOFT, will bring our specialized strength built over the years to many games genres and meet global gamers across multiple platforms. We ask for your continued support and encouragement, and we'll come back next quarter with many more things to share. Thank you.

[Foreign Language] Now Q&A session will begin. [Operator Instructions] The first will be provided by Jingu Kim from Kiwoom Securities.

[Interpreted] I would like to ask my questions mostly around TL. Has there been any change in the schedule to have a simultaneous release across the PC and the console? If there's any change in the upcoming plans, please share that with us. And also regarding the companies who will be publishing these titles for different geographies and jurisdictions, do you have -- would you be employing different publishing companies? Or which geography or region would you be targeting for this game title? And regarding the business model, compared to your other lineups, it seems like the pay-to-win element is much more milder. Would there be any different approaches for different countries? If you could provide some color there, that would also be quite helpful. And also can you share with us what your PC and mobile lineup is that is actually using the Lineage IP? And do you foresee any potential cannibalization?

[Interpreted] So yes, this is the CFO. I will respond to your questions about TL. But before I do that, I would like to congratulate you on such a successful game that we've seen from your baseball team, Kiwoom Heroes. Yes, regarding the release of TL, we do not have any changes to our original plan of going to PC and console simultaneously. So regarding the publishing entity, there will be an official announcement soon by the business unit. So it would not be very appropriate for me to provide that information ahead of that. So please, I ask for your understanding. But I can tell you that there has not been any change to our original plan regarding the publishing entity. Regarding the global exposure in terms of the geographies, our objective is to, yes, have an overall global footprint. Now you've also asked about the business model. We are very proactively trying to incorporate the aspects of the global trend and the needs and the requirements that we are getting from the global base users. Unlike our previous approach where basically there was focus on the very special characteristics of MMORPG that worked in the Korean market and in the Asian geographies, but for this game title, we are much more focused on the global universality, which we wish to incorporate in our business model. So unlike our past experience where, when we release a game title, there is a significant concentration of high level of sales at the initial phase and then we go through a process of decaying or downward trend, so unlike that, for this game title, we expect that the initial heavy concentration of sales or revenue will be more mitigated, but we will see a much more extended and longer tail. So we can expect a more steady revenue trend from a long-term perspective. Regarding the potential for any cannibalization. First, what I can tell you is that the TL, once again, is for PC and console, and it employs a different business model. So we do not expect there to be any significant cannibalization. And another second point, as mentioned during the presentation, basically, we have, from our existing lineup of titles, a highly loyal customer base or user base. And also the balance -- the game balance that we offer to our gamers is outstanding in terms of its balance. So we employ such a great characteristics in that regard. So our user base and gamer base, we believe, have high level of resistance. And they perform a role where they would be able to fend off the potential cannibalization. And last point is for TL. Unlike the other MMORPG titles, we are targeting a totally new user base as well. So that is another element that will help us mitigate the potential risk of cannibalization.

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

[Interpreted] I would like to ask 2 questions, particularly on your recent announcement of LLL and Project G. I understand that LLL is a shooting genre, but it seems like a lot of game companies in the MMORPG realm, they are very much focusing on developing such a shooting genre game title. What differentiates NCSOFT from your peers on this? And the question regarding Project G. You've mentioned that it's a AAA mobile game title. Can you provide a little more color? Which genre is Project G in? And do you -- what is the upcoming schedule like? Second, recently, there was a press article saying that NCSOFT is developing an IP for another third party, very large-scale global company. Although you can't disclose the details of the specific IP project, can you at least provide us as to what your stance is regarding developing such IP for other entities?

[Interpreted] This is Jason. Thank you for that question. Regarding LLL, yes, you are right. As you've mentioned, many companies are currently focusing their efforts on developing such shooting genre game. As you know, this console and PC-based shooting games, they're an extensively large genre. It's actually MMORPG that is in the niche. The shooting genre basically is mainstream. It's popular. It's universal. It's significantly big in terms of its scope and size. So if we are able to develop a model where we could bring live servicing element to the shooting genre and have that generate revenue, that will really make this market and this pie quite significant. So the traditional incumbents are the ones that have dominance in the console service -- servicing-based shooting genre. But what's important is how we can actually convert that and apply the live service aspect that we can continue to create and generate stream of revenue. So basically, that is the strategic base upon which a lot of Korean game companies are currently developing this genre. So NCSOFT happens to be -- happens to be that very company that actually has all of these strengths that could make this possible. So come November 14, more details will be shared. And we believe that we, as a company, was able to find a way for us to leverage to maximum the strengths that we already have. And we believe that, that would be a differentiating factor. Once again, for more details on November 14, we will not just be unveiling cinematic trailers, but there will be much more information to come.

[Interpreted] Yes. Just to add one more point to what Jason has just mentioned. In the trailer that is upcoming on Monday for LLL, there is, of course, the front part and the back part. And if you look at the latter part of this trailer, you will see how we are different in terms of providing the shooting game. And this is not a short film. It is quite lengthy. So I hope you would have a chance to see all of this. And it's actually not a cinematic trailer, but it's an in-game video trailer. So please, I hope that you will be able to see that. Regarding this genre that Project G is in of the mobile pipeline of product, I can tell you that it is a quite big genre that Project G is part of. As I've mentioned before, Project G, I mean, I've read that in the research paper that although we were able to really bring a lot of profit by playing in the MMORPG domain, it still only accounts for a single-digit market share on the global level. So looking at this genre that Project G is part of, I can tell you that it is quite significant genre in terms of its size. And also, just as I've explained about LLL, what we've done is we have really thought hard as to how we could best leverage all the strengths that we currently have and apply that and apply that to Project G. So we thought very long and hard about that. So I think that if what we have envisioned does really work, we could actually even expect outperformance against our expectations. Lastly, responding to your question about collaboration with other global companies. As you know, because of our track record in achieving and in leveraging our capabilities in the multiplayer MMORPG genre, our capabilities have been proven, and we've been receiving a lot of requests from global players in terms of the collaboration. There will soon be details that will be announced, but I can tell you that, this collaboration and cooperation that we will enter into with a global partner. Currently, that negotiation process or discussion process is well underway, and we are almost reaching the end of that process. So once we close on this deal, we will be able to share with you more details on this. And I can assure you that, that information is upcoming quite soon. Once we announce that, I'm sure that our shareholders and investors will be able to see the big picture and that I hope that you will be satisfied with the big picture that we are laying for you. Just as we are doing for TL where we're planning to work together with a globally well-renowned publishing partner, this is a new experiment for us and a new model for us. Just as we're doing for the publishing side, on the developing side as well, the discussions are ongoing with these global players, global companies, and we are almost at the end of gaining a good result out of that.

[Foreign Language] The following question will be presented by Jae-min Ahn from NH Investment Securities.

[Interpreted] My first question relates to your TL, the business model. I looked at the trailer, and I see that the business model is more or less very similar to Lineage. For instance, you are adopting [indiscernible] and other doll characters, and these aspects seem to be quite similar to Lineage. So some people say that TL is not that much different from Lineage. But can you provide some more information on the VM that will be used for TL? And when I saw the trailer and the videos, I didn't see much aspects regarding console. I would like to understand what type of support you will be providing, especially in terms of the PC cross-play. Second question is, I see that NCSOFT tests have been quite aggressive and proactive in the global business. Your revenue stream from Guild War 2 is quite good, and you are continuously making global investment. Do you plan to employ those know-how and adopt that to the global business of TL? Because it seems like since Guild Wars 2 and the MMORPG genre is relatively quite successful, I would like to understand what types of elements and the know-hows and lessons you were able to use for development of TL.

[Interpreted] The first question, no, the VMs are not the same between TL and Lineage. We will soon have an opportunity to hear from Mr. [ Moon Hyung Chae ], in charge of this title from the business unit, and I'm also closely talking to him about these aspects as all. In terms of [indiscernible], the dolls and the metamorphosis element, if we are to just take what's working at Lineage, then we would just be making a repetition and same copy of that in TL. So that is not what we want to do. So once again, in the near future, I'm sure there will be an opportunity for him to actually provide that information in another occasion. Regarding console, the console was also part of the test, and we've done an in-house development and console test as well. And console play was actually featured in the video reel that you've just seen. So basically, once again, there has been a simultaneous development across console and the PC. Right now, we're in the optimization phase. Regarding Guild War and the use of the NCWest know-how, yes, we are strategically making use of that know-how. Guild War and also the main mother company's game titles and us taking that to the global market, what we are doing right now is fine-tuning the NCSOFT strategies on all of this. Regarding TL, we once again mentioned that we're taking a new approach of using the global publishing partner. And the global partnership is where we are currently putting our emphasis on. Regarding other IPs, of course, it will be case by case, but there will be cases where NCWest capabilities and collaboration with them would also be quite important.

[Foreign Language] The following question will be presented by Jong Hwa Sung from eBest Investment Securities.

[Interpreted] I would like to ask 2 questions. First question relates to TL and AION 2. TL took a quite significant time for developing this game title. It's game genre is multiplayer. So it's RPG. So it's basically MMORPG. But if you look at the Western market trend, it seems like the bigger hits are coming from single-player mode and shooting adventure type of games for PCs and console platform. So I would like to understand what you think is the appeal of such a multiplayer game title as against the Western market. And also for AION 2. Although, originally, I understand that you announced this as a mobile platform-based MMORPG game, but there has been change in the schedule. And I think I heard that you will not be just dependent on the mobile platform. So does that mean that for the global markets, you are currently redeveloping this title so that it could also be supported on PC/console platform? And AION 2 then, would you also be thinking of changing this into a single mode and of a different game genre other than RPG? And second question is just a simple question. Regarding the performance-based, long-term incentive and the booking of such expenses, can you provide some more explanation there as to what that really is? And these welfare benefits for the employees, basically these expenses, are they -- have they been deferred to the following quarter?

[Interpreted] This is the CFO. I will respond to the question on TL, and I will hand it over to James to talk -- Jason, excuse me, to talk about Aion 2. There are 2 aspects regarding TL. The first is I understand where you're coming from in terms of your question because we have such a strength in MMORPG. That's why it is quite difficult for us to actually, before it's released next year, to be able to communicate all of the aspects of TL. So having said that, other than the PvP aspect, non-PvP aspects have also been strengthened for this game title, especially since it is supported at the console -- by the console platform. And secondly, it really has a very strong narrative aspect to it, narrative content that really help further enhance and elevate the immersiveness of what this game offers. And the action element and the action system is also quite different from other MMORPG game types that currently exist. So compared to the titles that -- what we are familiar with, this game is going to be very different. And so we cannot just define it as an RPG game. It is not the same as the existing RPG games. And if you look at MMORPG, it is not just about the genre itself. What we are doing is we are fully leveraging the current trend and how the Steam platform is growing and also how the gamers and users are well accepting, and there's high level of receptiveness regarding the in-game item sales. So if we are to develop a very high-quality game that has the elements of PvE, the narrative as well as the strong action system, then I believe that we will also be able to further grow this genre at the same time. So once again, these 2 elements will come together in hybrid, and that will define and dictate the differentiation of TL. And we will also make internal preparations to make sure that during the [ NCing ] event, when we showcase or when we provide information on TL, that we will be able to fully communicate all of these aspects.

[Interpreted] Now this is Jason. I will respond to your question about Aion 2. We still have some time until the release of this title, so I won't be able to provide any specifics at this point in time. Having said that, this game title is being positioned as a next-generation MMO powered by Unreal 5 Engine, and there will be concurrent releases across the world. And the platform that we will be using is PC/mobile. So it will be a multi-platform game title. A lot of people are saying that for NCSOFT, isn't AION the next big thing? Yes, that is true to a certain extent because it is one of our very important IPs that the company has. And even a decade ago, AION in the North American and European market as an MMO game title grows then more than KRW 100 billion in revenue. So when AION grows more than KRW 100 billion from the North American and European markets 10 years ago, basically, if you look at the traffic that had been generated on the PC platform, although we are unable to disclose the statistics, if you look at the recent trend compared to then for the MMORPG games in North America and Europe, the PCU scales are actually beyond what one can imagine. And every single time there is a new title that is released, basically, that PCU measure is also continuously up-trending. So compared to the KRW 100 billion in size of sales that we saw for AION 10 years ago, basically, we have multiple folds of user base, 2x, 3x, even more than that, that could -- who could actually be the target for this game. So regarding the console platform, I would predict that you were referring to one [indiscernible], but we are also receiving a lot of contact from overseas experts on these various different areas. So for the role playing and the adventure games, if we are able to somehow incorporate a multiplayer element to it and really enable live services capabilities, which we actually hold, we believe that there is a great potential for this game title. And so Aion 2 development is taking place in step with the trend that we see from the market. So the market backdrop is very different now compared to 10 years ago. One aspect that really stands out is the mass popularity of these types of games. That really is what differentiates the current market environment. And that is under -- basically, that is the backdrop under which we are currently endeavoring to develop the most appropriate MMORPG title. Yes. Lastly, the message that I want to share is not just on the labor cost item itself but overall marketing and the cost control of the company. This year, corporate-wide, the top management had a very strong intent to control the cost more efficiently. It's not that we're going to stay away from spending the necessary funds. It's just that we have really reviewed the overall expenditures so that we can be much more rational. So as you know, because our organization is really big in its size, I think starting next year, these efforts will start to really show in the final outcome. Corporate-wide, there has been efforts behind such cost efficiencies. And next year, I believe from a mid- to long-term perspective, we will be able to see a more -- much more rationalized expenditure management. Regarding your specific question about the welfare benefits, this is not tied to any corporate strategy. It's just quarterly fluctuations that we see because in Q2, there was spending regarding the 4 major insurances. And in Q3, that element dissipated. So it's just quarterly differences. Regarding the performance tied pay, basically, whenever we have a new title release, there's development-related incentive pays as well, which was just not in the Q3. So this was also a reflection of the seasonal cycle. So come Q4, we may not continuously see this figure go down. It can actually take -- it could actually go up again. But having said that, from the corporate-wide perspective, our approach is to rationalize our spending. So come next year, we would like to really show to the market that NCSOFT is rationally controlling its cost.

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

[Interpreted] Yes. I'm from Samsung Securities. I see that this quarter, there's been a significant dip in your marketing spend. What do you expect the trend to be like for Q4 and Q1 of next year? And also for TL, what is your expected marketing spend?

[Interpreted] Yes. Regarding marketing, in Q3, there were no big marketing spend items. But in Q4, I expect there will be an uptick because of the TL as well as many more IPs to come for next year. What I can tell you is that, that marketing spend is going to be at a more rationalized level compared to the past marketing trend. Also for TL marketing in the second half, this will be actually the first case, exemplary case of our -- of us rationalizing the marketing spend at the corporate-wide level. So compared to the previous new title releases, you will be able to see a much more disciplined marketing spending. So once again, compared to the previous releases, we would be able to see a clear change.

[Foreign Language] The following question will be presented by [ Dong Jin Kim ] from CLSA.

[Interpreted] Yes. My question relates to the guidance for your existing lineup of Lineage mobile titles. In Q3, for Lineage W, you defended the downward moderation quite well at about negative 20%. Do you expect that downward trend to ease as we enter into Q4? And do you also expect Lineage M's solid trend to continue? Second question regarding TL. You did provide some information here, but I want to focus on the game play of this title. If we just look at the trailers that has been released, it's -- I think that there is, I guess, not enough content that shows the actionability as well as the heating sensations and PvE elements or PvE content. So I -- if we look at other titles that were successful in employing the play-to-win model, they really had a very strong PvE aspect to it. So I would like to understand, what is the core content for TL? Is it PvP, player versus player, or PvE?

[Interpreted] Responding to the question about Lineage mobile, as you've seen for Lineage M, for third quarter and 3 consecutive quarters, we've seen an upward growth trend. It's all underpinned by very solid traffic. And also releases of the updates have helped with that growth trend, leading to a good performance. In Q4 -- because in Q3, we had a large-scale update, but in Q4, we don't. So we could see the revenue dip. But considering that this game title was released 5 years ago and we are into the -- there's been -- it's been 5 years since its service and we are still seeing a very good traffic measure, and hence, we have -- we believe that we have the basis for steady performance for Q4 and next year. For Lineage M, we are seeing that natural erosion. Q3, however, that extent of the decline or the erosion was quite solid compared to Lineage M and 2M, and hence, we were able to drive good performance. As we enter into end of the year and early next year, we will see this game title top line trend to completely stabilize. And we are, at this point, doing much as possible to minimize the extent of that erosion as much as possible so that this game could actually have a stable and moderation trend that is on par with previous titles or better.

[Interpreted] This is the CFO responding to your question on TL. The videos that you've seen, I think, is our in-house test-related videos and trailers thereof. So this was where we've run a stress test on this game title. So that's probably why the PvP aspects were more featured compared to the PvE. You asked whether -- which is more importantly featured in this title. Is it PvP or PVE? I can tell you that this title is one that has a very good balance of both of those elements.

[Foreign Language] The last question will be presented by [ Han Jong Kim ] from [ Tower Investment and Securities ].

[Interpreted] I would like to ask just one question. I understand that the very core identity of NCSOFT is in the MMORPG games and the console games, but it seems -- but it seems that recently, you've been putting a lot of resources back in console game development. So does that mean that you have now changed your identity? Or if that is not the case, what is your strategy or approach for the console games? And in the current pipeline, what is the mix between the MMORPG game versus the non-MMORPG games under development?

[Interpreted] So yes, that's a very big picture question. We never intentionally defined ourselves as a company with the identity of MMORPG only. We were just really good at developing and providing such MMORPG titles. But if you look at -- I guess if you think about the vision, basically, it is such that we are really thinking hard as to what our strategy should be for us to better meet the global game market changes and the demand. So our vision is actually bringing the multiplayer game and popularizing this game. And also -- so it -- I don't think it's appropriate to say that are only serious about developing MMORPG titles, whereas we're just testing these other genres, like the shooting games and other adventure games, for instance. We are also very seriously developing these other games that are non-MMO. Because console is a very important part of the global platform, hence, we're putting in a lot of efforts. In terms of the headcount mix, the mix between live and nonlive headcount is on par with one another, especially for new title development. Currently, the MMOs versus non-MMO, their mix, the ratio portion is also quite similar. Just to wrap up. Internally, there are a lot of, I guess, changes or a lot of efforts that are put in. But also externally in terms of the partners that we collaborate with, we are not just going to be partnering up with one single entity. We are open to many options for us to explore ways for us to better popularize this game genre and for us to expand our global footprint. And NCWest, in that regard, is a good example, good case in point. And we will be exploring many opportunities to partner up with many companies outside. And we will not just be partnering up with one single entity. Once again, I repeat that. So we need these types of success in order for us to, I guess, overcome the current discounts that we see in our value. Well, thank you very much. This brings us to the end of the Q3 2022 earnings presentation by NCSOFT. Once again, thank you very much for your interest. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]