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 call of the fiscal year 2023 first 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 first quarter 2023 earnings presentation. I will begin with the earnings highlight. On the back of downward stabilization of Lineage W sales, Q1 sales was down 13% Q-over-Q and 39% year-over-year, reporting KRW 478.8 billion. Operating profit was up 72% Q-over-Q to KRW 81.6 billion on across the board decline in operating expense, while on a year-over-year basis, operating profit dropped 67%. The pretax income was KRW 141.3 billion, with net income at KRW 114.2 billion, both turning around to profit versus last quarter. On a year-over-year basis, there was a decline of 39% and 32%, respectively. Next is breakdown of sales by each game. Following the first year anniversary of the previous quarter, there weren't any large-scale updates for Lineage W this quarter, which drove Q-over-Q sales down by 31% to KRW 122.6 billion. We will have another round of large-scale updates scheduled during the second quarter, and as top line will enter a cycle of stabilization in 2023, we can look forward to a more steady earnings trend going forward. Lineage M posted Q-over-Q growth of 15%, reaching KRW 130.1 billion. We see all of the traffic-related measures, including MAU, DAU and PCU, trending strongly as the game still is in its heyday despite it being a seventh year since the launch. We will continue to extend the life cycle of the game underpinned by user-centric servicing policy. While Lineage II M domestic sales is on a solid trajectory due to a decline in overseas sales from North America and Europe, sales were down 11% Q-over-Q, reporting KRW 73.1 billion. We are planning on an update that will revitalize in-game combat in Q2 so that we may achieve steady revenue stream throughout the year 2023. Sales from 5 PC game titles were down 12% Q-over-Q to KRW 91.4 billion. This decline is attributable to the fact that we dialed down the level of business activities, which in turn pressured down sales from Lineage, Lineage 2 and Aion, whose sales shot up last quarter owing to a large-scale update. Blade & Soul sales were up 1% Q-over-Q to KRW 7.3 billion while Guild Wars 2 sales fell 10% Q-over-Q, reporting KRW 20.4 billion, on lapse of impact from the release of expansion pack last year. Finally, royalty sales were up 9% Q-over-Q to KRW 42.3 billion, with China's Guild Wars 2 royalty seeing a much higher Q-on-Q rise. Changes in competitive landscape in China since early this year triggered a steep growth in traffic and sales for Guild Wars 2 in China, which led to highest quarterly revenue since its rollout in 2014. Next is the cost breakdown. Q1 operating expense was down 21% Q-over-Q to KRW 397.1 billion. Labor cost was down 9% Q-over-Q to KRW 211.9 billion on the back of lapse of impact from last quarter's Lineage W incentives. Marketing expense was down 90% Q-over-Q to KRW 4.9 billion, with the absence of large-scale update across the game portfolio. Depreciation increased 8% Q-over-Q, reporting KRW 27.9 billion, while variable costs and other expenses were down 21% Q-on-Q to KRW 152.5 billion on lower distribution fees following a decline in mobile game revenue. This year, we plan to bring to market new global titles, including TL in the second half of the year. As per the recent announcement, we plan on running CBT, closed beta test, of TL against 10,000 users, which is not much different to a full-fledged service level. We therefore look forward to your interest and participation, as our intent is to do a final check on the game and fully open and share in advance diverse array of content from TL. With the start of CBT, TL will begin its race for a rollout. And while that's ongoing, we will come back with more news to share. Also, preparations behind 4 different mobile games which are non-MMOs are on a smooth sail. We will present a unique game ability by merging our MMORPG development know-how into these games. By launching new titles from varying genres and platforms, we will be writing up a new story of growth for NC. Lastly, we have been endeavoring to develop AI technology under the recognition that we can offer new value to customers and the company alike when we combine our AI technology with games. Project M last March showcased AI-powered digital human, receiving positive feedback from both Korea and overseas. We plan to open up our proprietary AI platform to our employees so that they can utilize such AI tech in actual game development. We are planning on developing AI technology tailored for the game business through which we will not only make the game development process more efficient, but also make more immersive content, with a view towards leveling up the quality to a new level. These efforts will help us explore future growth opportunities, and as such, I ask for your continued interest. This brings us to the end of the first quarter '23 earnings presentation. I hope to be back with more promising news next quarter. Thank you.

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

[Interpreted] I would like to ask two questions. First is, we'd like to know whether there has been any impact on NCSOFT's traffic or top line revenue on the back of the launch of these large-scale mobile MMORPG new titles that we've seen in the domestic market, and also, can you provide some color as to what your outlook is for your second quarter mobile game revenue? Second question is that I've seen that -- I've seen there were news articles that NCSOFT will most likely be participating in the G-STAR event. So even -- despite the fact that the TL will not yet be rolled out at that point in time. Or are these 2 issues separate and independent?

[Interpreted] Well, thank you for that question. Regarding your question about deepening competition in the MMORPG market and the release of new titles into this game segment, actually, from our company's perspective, we view this from a positive light. And we have not yet been able to observe any changes to the traffic that is being driven by our 3 mobile IP games. And we also believe that such a steady trend will continue into the second quarter, I mean in terms of the top line revenue. So all in all, we believe that there is and there will be limited impact in terms of the erosion into our revenue and traffic regarding the impact from these other competing titles. We actually believe that this is an opportunity for us to once again affirm a very strong dominance that we are enjoying in this MMORPG genre in the domestic market. Now regarding your question on G-Star, as you know, we've been very actively showcasing and highlighting our new title releases through the NCing, our online approach. But this year, we are also, by participating in the G-STAR event, we'll be able to really meet face-to-face offline with our customers as well as related stakeholders. With regards to which title we will be taking to G-STAR, it is something that we will be making a decision on in the near future. And regarding the relationship between TL release and G-Star, irrespective of the G-STAR event our TL related timeline is at this point ongoing smoothly.

[Foreign Language] The following question will be presented by Junhyun Kim from HSBC.

[Interpreted] I have two questions to ask. First is, aside from TL, can you provide us with an update as to what your mobile game timeline and pipeline looks like? Can there be any timeline differences or gaps vis-a-vis Amazon games? And second question is you -- I understand that there's quite a bit of update that is scheduled to happen for your mobile game in the second quarter. In Q1, you've significantly saved on marketing spending. So as we enter into Q2, will there be a rebound or increase in marketing spend, or would you be able to maintain the current level of marketing spend efficiency under which you would carry on forward with the update?

[Interpreted] Thank you for that question. Our original plan from the beginning was to release 5 new titles this year. That includes TL. You know TL quite well. There are other 4, which is non-MMO mobile title. So, regarding the specific timeline for release of these non-MMO mobile games, we will consecutively or subsequently share with you the timelines when the time comes. Now TL, you mentioned TL as well, so as you know, we are at this point coordinating the specific schedules with our global publisher, which is Amazon Games. And as you know and as was announced or as was mentioned, basically, our target is to release it in the second half of the year. Now regarding the launch schedule, currently what we are doing is we're working on to come up with a way that we could maximize the impact of this new release across the global market. So currently the marketing activity plan is being -- very thoroughly being prepared for us to achieve that objective. And we will be able to, in the very near future, hold a separate event where we will disclose and open up the actual schedule for this game title so that we could better help the market to understand how things would go. Regarding the efficient use of marketing spending, we've been highlighting the importance of this factor since previous year. Most likely in the second quarter we think this marketing spend level would normalize to the previous levels compared to what we've seen in Q1. I say that because during the second quarter we have many more updates that's lined up and also items under the business plan that will be implemented. So obviously that would increase the marketing spend more compared to what we've seen in Q1 based off of these more active marketing activities that is planned. Having said that, our position has always been the case that marketing spending and how efficient we actually go about spending the marketing budget has to really link with the generation of top line revenue. So not just from a short-term perspective, we actually take the effectiveness of such spending when we carry out the plan. So once again, under, as per, or aligned with what we have planned, our second quarter marketing spending will creep up compared to what we've seen in Q1. But having said that, in terms of the total marketing spend, like was the case for the previous year where we were able to efficiently really spend our marketing budget, we think that for this year, on a per year basis, you will see the marketing spend to be flattish versus previous year.

[Foreign Language] The following question will be presented by Dong Woo Kim from Kyobo Securities.

[Interpreted] I have two questions I would like to ask, just some of the specifics on your marketing spend. Can you provide us with a number as to what the percent of your marketing expenses against your top line sales or revenue and the absolute size of this marketing spend? Second is, can you elaborate as to what the company stance is or approach is towards blockchain?

[Interpreted] Well thank you, Mr.Dong Woo Kim, for your question. The percent of marketing spend against our gross revenue last year was around 7%. So this year, we are looking to have a spend around that level as well. But just to remind you that this is not a number that's dictated top-down. It's not like we are having any financial control and that this is a number that has been handed down from the top to bottom. This is based off of the business judgments that were made at the business unit level. For marketing budget and marketing spend, short-term revenue is important, but there are other business indicators that come into play. And so for this year, it's projected that we will more or less spend about 7% of gross revenue as we've done in the previous year. So -- and another point to -- another thing to point out is that we just have a corporate-wide consensus whereby we will not just recklessly spend marketing expense. We will be thoroughly mindful of the effectiveness of that money spent. Regarding blockchain, the company is continuously interested and also researching and studying into different technologies relating to not only AI, but blockchain as well. As you know, for the Layer 1 blockchain, we've recently made investments into a U.S.-based company that was recently listed, Mysten Lab, known for its Sui token. As such, we are very closely monitoring the overall market environment and technological changes. In terms of the blockchain technology, the company does believe that it brings value to the gamers. But we are not approaching this blockchain from the -- with the P2E, Play to Earn, approach, more it's actually aside from P2E, we are thinking of many different ways where we could bring blockchain technology and merge that and fuse that with the game. And in so doing, there are many aspects that we need to be thoroughly mindful of, for instance the impact that it will have on the in-game economics as well as the in-game balance. So in light of the current volatile market backdrop, we really need to be very prudent when we approach this blockchain technology. So up until the time we have firm belief and confidence in the way forward with blockchain, we will not be able -- we will not be thinking of applying that or making announcements externally with regard to its application to games.

The following question will be presented by [indiscernible] from CLSA.

[Interpreted] I have a follow-up question to the previous question. There were a multiple number of competing titles that were released, and you've mentioned that there has not been any big impact on your business. But if you look at Lineage W, relatively recently launched title, the Q-on-Q decline was steeper than your guidance. And there was also a quite strong competing title that was launched in April as well. And according to Sensor Tower numbers, Q-on-Q decline is actually quite pronounced. So can you provide a little more color on the stabilization process of LW, Lineage W, and any new guidance on this business? Second question is, I personally think that TL being a global launch, its exposure was very much limited. I would like to understand what your plans are to increase the exposure to this TL release which is upcoming. For instance, running a large-scale beta test against global users. Do you have those plans in place? And another aspect to this question is that in the past, when people -- when NC was about to release a new title, market expectation really built up, but it's maybe because of a change in the markets that you're targeting and the changes in strategies that followed, we -- it doesn't seem like that market expectation is building up that easily. Why do you think that rationale is? And why, from the market's perspective, should we be looking forward to TL launch?