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 fourth 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. This is Jason Lee, Head of IR at NCSOFT. Thank you for participating in this conference call for the fourth quarter of 2022. Now let me begin my presentation with the earnings highlights for the full year of 2022. For the full year 2022, sales totaled KRW 2,571.8 billion, representing an increase of 11% year-over-year as the result of Lineage W's global success was captured in full. Operating profit posted KRW 559 billion, up by 49% year-over-year, driven by top line growth and more efficient marketing. Pretax income was KRW 624 billion, an increase of 27% year-over-year and net income was KRW 452.6 billion, up by 14% Y-o-Y. In the case of 4Q sales, it moderated to KRW 547.9 billion, showing a decline of 28% Y-o-Y and 9% Q-o-Q as the sales of key mobile games softened. Operating profit was KRW 47.4 billion, a decrease of 57% Y-o-Y and 67% Q-o-Q. Q4 pretax profit and net income, both turned into the red due to an increase in nonoperating expenses stemming from a stronger one. Next, let me go over the full year 2022 sales of each game. Mobile game sales reached KRW 1,934.3 billion, representing growth of 20% Y-over-Y; this is the highest sales we have had since we started the mobile game business. The sales of the 5 PC online games combined was KRW 390.4 billion, a decrease of 8% Y-o-Y. The company continues to expand the life cycle of our PC online games by leveraging our unique live service operational capabilities. In particular, Guild Wars 2, though it is in its 11th year since launch, still was able to achieve a strong growth of 29% Y-o-Y. Royalty totaled KRW 157 billion, a decrease of 9% Y-o-Y. To look at the Q4 performance by game, Lineage W came in at KRW 176.9 billion, a decline of 10% Q-o-Q. In the fourth quarter we successfully completed a large-scale update to celebrate the first anniversary of the game. We were able to confirm more enthusiastic and active participation of global users in battles. Going forward, we will focus on maintaining stable performance by providing a wide variety of play contents. Lineage M posted KRW 112.8 billion, a decrease of 23% Q-o-Q due to some moderation in the intensity of business activities. Lineage M to this day still enjoy solid user traffic levels that are difficult to believe for a game in its seventh year. In the future, we will continue to ensure that this momentum is continued by releasing [ continuous ] and also high-quality updates. Lineage 2M recorded sales of KRW 82.3 billion, a decline of 4% Q-o-Q. In the fourth quarter, there was the third anniversary update and new server openings, which attracted a lot of new year's and the return of dormant users. Based on this more user traffic, we will exert efforts to continue stable performance in the future. The sales of the 5 PC online games together was KRW 104.4 billion, an increase of 70% -- 17% Y-o-Y and 7% Q-on-Q. As new contents were released, Lineage 1, Lineage 2, Aion and Blade & Soul all achieved quarter-over-quarter growth. Guild Wars 2 sales was KRW 22.7 billion, which was up 2% Y-o-Y but down 9% Q-o-Q. Despite being a title with more than 10 years of service, Guild Wars 2 still enjoys a strong recognition and also highly loyal user base as a well-made MMORPG. With the recent changes in the competitive landscape in China, both sales and user traffic in China have grown significantly. Royalty totaled KRW 38.9 billion, a decline of 10%, both Q-o-Q and Y-o-Y. Next, to break down full year 2022 performance by region, Korea sales was KRW 1,624.6 billion; Asia KRW, 625.2 billion; North America and Europe, KRW 165 billion; and Royalty 157 billion. Of these numbers, the growth of 40% Y-o-Y in Asia and 44% Y-o-Y in North America and Europe stands out the most. For your information, overseas and royalty 2022 sales totaled KRW 947.2 billion, an increase of 29% Y-o-Y, which is the highest level in the history of the company. The contribution from overseas and royalty sales to total sales continues to grow year after year. In 2022, it accounted for approximately 37%, and we plan to increase this percentage with new global game releases. Next, let me discuss Q4 operating expenses. Q4 operating expenses totaled KRW 500.5 billion, which is a decrease of 23% Y-o-Y but increase of 9% Q-o-Q. To break it down by line item, labor cost was KRW 232.6 billion, down by 9% Y-o-Y, but an increase of 23% Q-on-Q, which was driven by special bonuses given to all employees and incentives related to the success of Lineage W. Marketing expenses decreased 59% Y-o-Y, but as marketing for mobile games increased, it was up 24% Q-on-Q to KRW 48.1 billion. Depreciation was KRW 26 billion, which is an increase of 1% Y-o-Y, a decrease of 3% Q-o-Q. Variable costs and other expenses totaled KRW 193.8 billion, showing a 22% decline Y-o-Y and 5% drop Q-o-Q as distribution fees decreased with less mobile game sales. Despite the uncertain business environment in 2022, the company was once again able to highlight our solid live service operational capabilities with Lineage W hitting KRW 1.32 trillion in total sales since launch and Lineage M firmly maintaining its top position in the Korean mobile game market. In 2023, we are planning to launch a wide variety of new games that are based on this key competitiveness into the global market. First for TL, which is one of the most anticipated games in 2023, we will run its final test from February 21, after which we will engage in full marketing activities leading up to the first half launch as scheduled. So we ask for your interest and support. In the not too far future, we will have a separate event during which we will be able to share more detailed information about TL. So please wait for that event. In addition, the preparation for the 4 mobile games aiming for 2023 launch are also going smoothly. All 4 games are of a non-MMO genre, but we are applying some of our MMORPG development know-how in areas it fits to provide different and unique gameplay. More details about these games will be released during this first quarter. Finally, with top priority on enhancing shareholder value, the company has maintained a long-standing policy of providing cash dividends equal to 30% of net income to shareholders. This year, again, we have decided on cash dividend of 30%. Moving forward, we will continue to diversify our portfolio to represent a wider genre of games and continue to achieve higher growth in the global market to ensure we can further strengthen shareholder value. Again, we look forward to your interest and support in our endeavors. Thank you.

[Foreign Language] Now Q&A session will begin. [Operator Instructions] The first question will be provided by Eric Cha from Goldman Sachs.

[Interpreted] There are 2 questions that I would like to ask you. First is with regards to your key mobile games, if we were to ask for some guidance about the direction of performance for the first quarter. What would that actually look like, in particular for Lineage W and now we are in its sixth quarter, so should we deem that this game has entered its stabilization phase? The second question that I would like to ask you is about, during your presentation, you did mention somewhat about the pipeline going forward. But is there more details that you were able to provide. For example, for Project G, is it still valid that it will be opened within the first quarter? And in addition to that, I do believe that previously, there was some mention about some IP collaboration that may be a possibility working with other companies. Is that still something that you have planned? And would that still stand valid?

[Interpreted] So thank you for your question. Maybe to first talk about Lineage W. If you look at the numbers for [indiscernible], I do think that when you compare this game to the likes of Lineage M or Lineage 2M, you can see that the decline rate up into the fourth or fifth quarter somewhat is in line with our previous games. So we do believe that going into the first quarter, that for this game, it would be safe to deem that it is almost close to the stabilization period. Of course, whether it will be at the same rate of decline that we have seen for the previous games or whether it will actually soften a bit more is something that we will have to wait and see when it actually happens. But I do think that it would be that the game has now entered into the stabilization phase and that would stand valid. So taking this as the overall base, what our overall objectives would be for this game is that until the end of 2023, as we have done with Lineage M and 2M, we want to make sure that this is the level that we will continue to maintain and continue to support. And in terms of the daily rate numbers, I do think that this is something that you will have an opportunity to be able to confirm soon. However, in terms of whether it's reaching a stable level, I do think, again, that it's safe to say yes.

[Interpreted] And also with regards to more details about the pipeline going forward, I think that during the opening remarks that Jason has provided, that was a very good overview for our pipeline going forward. And added to that, I think what I can say is that the general stance that we have for our mobile games about the discussions about more details on a game to game level. For new games going forward, I think that the main channels of communication are to be in sync and also the development teams that are in charge of the actual game development. So I think that we want to provide and be able to communicate the details through these levels going forward as a general stance of the company. So as a result of that, at this event today or during this call today, what I can actually say is that in addition to TL, as we have mentioned before, we do have a lineup of 4 additional games that are of a non-MMO in nature, which we are planning to launch by the end of 2023. And about the more specific details about each of these games and how the progress is going forward, I do think that through other events and other opportunities, we will have the opportunity to provide more detail. So I do believe that you may have had the opportunity to see the overall video that came out for PUZZUP. It was released a couple of days ago. And if you look at the number of views, we believe it's very encouraging. In addition, during the first quarter, of course, one by one, we will have different opportunities to actually introduce our new mobile games. I think that in terms of the overall sequence, it will go from Project R to Project G and then maybe to Blade & Soul S. Maybe you take them in -- taking them in reverse order. For Blade and Soul S, this is a collectible RPG that will be launched within the Group 1 areas of regions. In addition to that, for project R, this is a mobile game in which, again, the launch area would be Group 1. And then for PUZZUP, we're looking at a global type of market situation. And then for Project G, I don't believe that we have specifically said that we would open this game in the first quarter. I think that it is that we want to introduce the game during the first quarter, but in terms of the actual genre, this is something that we haven't disclosed as of yet. And I do think that there will be other events which we will be able to provide you with more information. And lastly for the question that you asked about the possibility of IP collaborations with other companies that have IPs, I do think that, as we had mentioned in the previous call, this is always an area in which we leave open and are open to in terms of opportunities. In addition to that, as Jason mentioned during the opening remarks, I do think that in the very soon future, not too far future, that there will be opportunities in which we will be able to convey more information. And in addition to that, again, the same thing that I said before about our communication stands being that the development teams and launch teams that are responsible for the different projects would be responsible or in the lead for more direct user communication also is applicable to this situation. And just so that there's no misunderstanding. When we talk about possible collaboration, it's not just limited to IPs. Of course, when we look at possibilities of working with other companies, it would be on a global basis for a wide variety of different types of business strategies.

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

[Interpreted] I just have one question that I would like to ask you. During your presentation, you did mention that for Guild Wars 2 in China, you have been able to see a significant growth on the top line and also in terms of the traffic levels. And in addition to that, that you see there is a change in evolution taking place within the competitive landscape. So if you could elaborate a bit more about what changes you're actually noticing within the Chinese market, that would be appreciated. And in addition to that, for Guild Wars 2 specifically, if you could share out of the top line and also in terms of traffic, how much 0China actually contributes to this game. And in addition to that, what type of upside you would see to those numbers going forward? I think that anything that you would like to highlight with regards to this game would be appreciated.

[Interpreted] So on your question, as you are already aware, in terms of the individual game basis, in terms of top line and also traffic numbers, this is something that, unfortunately, we are not able to share with you, and that would also be the same story for Guild Wars 2. However, as you have been already able to see in China, World of Warcraft has suspended its services. And as a result of that, if you look at the overall MAU numbers and top line numbers for Guild Wars 2, although we would not be able to share specific numbers with you, have seen a strong increase in those numbers. I think what this actually means to us is that if you look at, well, of course, this is a game with a very strong and well-known franchise, if you look at it in size, I think WOW would be on par to may be the likes of Final Fantasy. And that would be about it. But what this actually means is I think that -- from a user level is that users have very specific needs that they want to have satisfied. And if you are able to come up with a product that meets that level and meets that demand, that there is an opportunity that you can actually capitalize upon. So I think that this applies to this situation. And this is true not only for China, but I do believe for other markets also. So there is a demand that would be a very stable level that is available within the market as an addressable demand. If we're able to come up with a product that satisfy that, then that does provide you with a very good opportunity. So I think that, that applies for other markets and also, of course, China.

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

[Interpreted] Yes. Thank you. The questions that I would like to ask is related to your expenses. If you look at Q4, I think that the level of incentives that were paid out were larger than we had expected. So the question that I would like to ask is that for 2023, in terms of your hiring plans and also in terms of the plans or the budget that you have for incentives, if you compare that to 2022 on a Y-o-Y basis, what would that increase actually represent? In addition to that, in 2023, you do have a full lineup of new games that you are going to launch. So if we talk about the marketing activity related to that, maybe as a percentage of revenue or in terms of absolute numbers, what do you believe that, that would represent?