NC Corporation (A036570) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Thank you all for joining the conference call for the NCSOFT Earnings Results. [Operator Instructions]. Now we will begin the presentation on NCSOFT's Fourth Quarter of Fiscal Year 2024 earnings results.

[Interpreted] Good morning, everyone. This is Jason Lee, Head of IR at NCSOFT. Thank you for participating in the NCSOFT earnings conference call for the full year and fourth quarter of 2024. We have Co-CEO, Byung-moo Park; and CFO, Willy Hong, joining us for today's conference. Now let me begin with the financial highlights. Q4 sales posted KRW 409.4 billion, up by 2% Q-o-Q due to an increase in online PC game sales and royalty sales, and down by 6% Y-o-Y due to the decline in mobile game sales. Operating loss totaled KRW 129.5 billion, driven by one-off severance benefits and increased marketing expenses. Pretax loss totaled KRW 10.3 billion, while net loss was KRW 7.6 billion. Higher foreign exchange rates led to valuation gains on financial assets and FX gains which reduced the size of the loss. Full year 2024 sales recorded KRW 1,578.1 billion, down by 11% Y-o-Y due to the decline in mobile game sales. Operating loss for the year was KRW 109.2 billion, marking a Y-o-Y shift to a loss. Despite the operating loss, gains on valuation of financial assets and foreign currency stemming from higher foreign exchange rates led to a full year pretax income of KRW 120.9 billion, down by 41% Y-o-Y, and a full year net income of KRW 94.1 billion, down by 56% Y-o-Y. Moving on to sales by game. Q4 mobile game sales totaled KRW 215.6 billion, down 15% Q-o-Q. Lineage W successfully achieved a sales rebound in a year driven by the popularity of [ New World ], which was released in celebration of the game's third anniversary. Last year, we rolled out major updates for key mobile titles and released New World that cater to the needs of different customer groups. This allowed us to secure a steady traffic base, which is a key competitive edge for an MMO game despite the competitive landscape. We will continue to focus on customer-centric operations to extend product life cycles. Q4 online PC game sales recorded KRW 93.4 billion, up 16% Q-o-Q, marking the highest quarterly sales across the past 2 years. Blade & Soul sales more than quadrupled due to Blade & Soul launched in Korea, while Guild Wars 2 sales rose 30% Q-o-Q, led by strong expansion pack. Royalty sales stood at KRW 73.5 billion, up by 93% Q-o-Q. Throne and Liberty's global success was fully captured in this quarter, offsetting the decline in royalty sales of other existing games. Full year 2024 mobile game sales posted KRW 936.7 billion, down 22% Y-o-Y. Online PC game sales totaled KRW 351.8 billion, showing a limited Y-o-Y decline of 2%, supported by a stable [ growth performance ]. Royalty sales reported KRW 182 billion, up by 26% Y-o-Y. Next up is sales by region. Q4 sales in Korea dropped 13% Q-o-Q. Sales in Asia rose 5% Q-o-Q, led by the rebound in Lineage W sales. While sales in North America and Europe saw a Q-o-Q increase of 25% due to the solid performance of Guild Wars 2 expansion pack. Q4 overseas and royalty sales together represented approximately 39% of total sales. Moving on to operating costs. Q4 operating cost reached KRW 538.9 billion, up 29% Q-o-Q and 24% Y-o-Y. Q4 labor cost was KRW 314.5 billion, up 56% Q-o-Q and 54% Y-o-Y. As we let a company-wide program to enhance organizational efficiency, one-off severance package payments were reflected. Q4 marketing expenses totaled KRW 55.2 billion, up 14% Q-o-Q and 37% Y-o-Y, driven by marketing for new title launch along with active promotional efforts for existing live games. Q4 depreciation declined by 2% Q-o-Q and 3% Y-o-Y totaling KRW 25.9 billion. Variable costs and other expenses saw a 2% rise Q-o-Q, but a 12% drop Y-o-Y, amounting to KRW 143.2 billion. Early operating costs totaled KRW 1,687.3 billion, up by 3% Y-o-Y with yearly labor cost and marketing expenses rising by 10% and 51%, respectively, against the previous year.

[Interpreted] Good morning, everyone. This is CFO, Willy Hong. First, I'd like to explain the shareholder return policy released through our public disclosure yesterday. Over the 3-year period, starting from the fiscal year of 2025, our company has decided to return 30% of consolidated net income attributable to controlling interests and cash dividends within the distributable profit set under the commercial law. However, this does not include gains on the disposal of NC Tower in Samseong-dong, which is currently in process. Additionally, as we promised last year, to ensure that treasury shares are maintained at a 10% level of [Technical Difficulty], we have decided to retire 410,000 treasury shares, representing 1.9% of total issued shares and a book value of approximately KRW 127 billion. And for your reference, to raise shareholder value and repurchase stocks from exercised appraisal rights, we have bought back 4.2% in treasury shares worth around KRW 177 billion since 2024. Currently, we hold 11.7% in treasury shares, which will be adjusted to 9.98% after the retirement program. Based on a stable dividend payout ratio and improved financial performance, we will continue to increase dividend payout and enhance [Technical Difficulty]. 2024 was not an easier year for us, particularly in Q4, we launched a company-wide initiative to achieve organizational efficiency and saw a large operating loss. As part of our efforts to address our investors' request for improved fundamentals and to secure a foundation for sustainable growth, this was an inevitable choice and we ask for your understanding. However, this year will be a year of a turnaround in terms of growth through global title launches while we work to overcome our existing challenges. Today, we're joined by Co-CEO, Byung-moo Park. If you have any questions, feel free to share them with us. We'll address them in detail and share the strategies and road map our top management has in store for NC. Going forward, we promise that we will come back with more positive news and would like to ask our shareholders and investors for your continued support and interest. Thank you.

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

[Interpreted] I have 2 questions. My first question is around AION 2. I think as time goes by, the importance of AION 2 is getting stronger. I think there are more opportunities for MMO [indiscernible] but recently, when it comes to the MMORPG that has focused on the economy, the track record has not been that great. So I was wondering if you have any measures to overcome this challenge, especially around AION 2? And then my second question is involving around a new IP investment. One of your competitors recently announced their policy to invest KRW 300 billion per year for new IPs. Of course, there could be some variable to that, but I was wondering what's your plan on the annual investment for new IPs?

[Interpreted] So thank you for the question. So I also agree that the MMORPG market is experiencing a stagnation, but there are 2 points that I would like to make first. Although the reason why we are seeing some sluggish growth in MMORPG, especially in Korea and Taiwan, is because there has been a surge of [ mini ] games that didn't really actually provide new user experiences. But when it comes to previous cases where we have released AION and Blade & Soul, the actual size of the market has grown rapidly. So we believe that if there is a new MMORPG that can provide new user experience, we think that there is still potential to grow in this market. And my second point is that regarding TL, we have launched TL globally, especially targeting North America and Europe last year, and we got the support from Amazon Games. And through this case of release, we were able to confirm that there is still a great amount of potential for MMORPG users in the global market. So we still think that -- but there is a challenge that -- considering that there are not many companies who can do a global launch of MMORPG. Therefore, we think that -- considering that the user number has reached more than like 7 million people. We think that there is still potential for the MMORPG genre in the market. So regarding TL, there are a few points that we have identified. First, we noticed that there is a preferential difference between Korean and Taiwanese users versus North America and European users in terms of their preferred platform, including PC and mobile, and which content that they like to use, gameplay characteristics and business models. Therefore, we want to differentiate our approach when it comes to release AION 2 for the Korean and Taiwanese users versus the global market. So for Korean and Taiwanese users, we want to release AION 2 first in the second half of this year. And for North America and European users, we want to take our lessons from TL and have a different approach for this audience. So regarding characteristics of AION 2, although we cannot give you details because it could be a spoiler, but starting from Q2, we are going to continue to enhance our communication with our users and make sure that we reveal some details regarding AION 2 before the release. So for the new IP investments and publishing, we are continuing to look for new genres and platforms. Last year, as we have mentioned, we have signed a contract, 2 cases in overseas and 2 cases in Korea, and overall, the investment amount was around KRW 60 billion to KRW 70 billion. And for this year, we're going to conduct similar cases of deals. So for last year, we have focused on subculture and shooters. So we're going to continue to make our investments in these kind of genres as well. And we are going to add [ H in RPG ] as well. And starting from last year, we have continued to look for opportunity for M&A deals. And I cannot give you details right now, but we looked into an opportunity for M&A with the company that has a great dominance in the mobile market. And although we have gone through many negotiations regarding investments, overseas and domestic side, but we couldn't actually make tangible results yet because there has been some negotiations left to reconcile the selling side and buying side. But there have been a lot of deal flow that we have monitored starting from last year. So we will make sure that we will make continuous investments, whether it could be -- and there has been a progress in our negotiations. And for M&A deals, like as we try to make a cluster for shooter games, we try to make a cluster for M&A opportunities, if possible. And so for the next 5 years on annual average, we think that the IP investments will be around KRW 60 billion to KRW 70 billion, and there will be more or less amounts added to -- depending on what kind of M&A deals that we can achieve. However, 1 thing I can share -- announce for sure is that, we are going to utilize treasury stocks for our M&A deals. Last year, we announced that we are going to keep the treasury stock ratio at 10%. And if we go over the ownership, then 10%, we will retire our treasury stock. So for our next year, we are going to look into the possibility of utilizing our treasury stocks for M&A deals first. And then if we can use them, we will retire the stocks according to the ratio. I hope my answer finds it helpful -- you find that helpful for my answer.

[Interpreted] The next question will be presented by Kim Junhyun from HSBC.

I have 2 questions. It seems like the voluntary resignation program has been implemented greater than expected. So I was wondering if you have any additional plan for company restructuring. And I think that most of the teams that were affected by restructuring were regarding non-legacy IPs. So does this mean that HQ will focus on MMORPGs while the other genre investments will be made by investees or subsidiaries? And my second question is about TACTAN. So are you still planning on releasing this game in the first half of this year? And do you have any like additional marketing plans to utilize channels like game shows for your company?

[Interpreted] So for your question regarding head count plan, earlier last year we had announced that we are aiming to reduce our employment size to the 3,000 level from 5,000. And in February 1, we have completed the spin-off programs for our 4 branches, and we have successfully reduced the head count to 3,001 people and including the spin-off that we have made last year. So 1,000 people have been moved to our subsidiaries, while 800 to 900 people were affected by the voluntary resignation program. But I can now say that we don't have a specific head count target for our future optimization plan. Although in order to make our structure more efficient continuously, we're going to do some efficiency initiatives, but we don't have a specific head count target. And at a higher level, we can say that our existing IPs will be [indiscernible] games, AION and Blade & Soul, and these will be implemented by HQ, while new titles will be pursued by subsidiary areas -- subsidiaries, studios and investees, that's the high-level direction that we would like to take. So regarding your question about TACTAN, we have made a spin-off for our studios for each games. But previously, we didn't really have a separate publishing entities within the development team, but we actually matched the HQ publishing teams with the games based on their genre. And we were able to establish some effective publishing plans through these initiatives. And for Project LLL, we think that we will be able to release the game within the second half of this year as we have conducted FTT and CBT in Q2. But for TACTAN, considering that it's an MMORTS genre and the user base is not that great, but there's kind of lot of rail users, but marketing costs needs to be significantly invested. Although the development has been made, we are still considering to make some polishing regarding the release plan. Based on the comments that were shared by our publisher, the team is improving the wild point of the project. So I would like to apologize for the delay of the release. But I would like to make sure that this is not a matter of development, but it is a matter of making the project to be more polished in terms of releasing and publishing. So regarding your question about marketing, it is true that we got a lot of criticism last year in terms of development, publishing, marketing and user communication. And starting from the last year, we have continued to look into how can we improve in these aspects. And to be short, we are focusing on having a great marketing and release plan targeting for each IP games that we will be released for this year. And also, we are conducting feedback evaluation in terms of the technological side that we have strengthened. So more fundamentally, I think that having a user-driven feedback is more important when it comes to our games. So we want to go back to the basics when it comes to our game. And so for marketing, in the previous trend, many companies focused on large brand marketing for blockbuster titles, but I think the things have changed a lot these days. Most of the games are focusing on user communication through FGT and CBT. So we want to take this kind of approach for our marketing plans as well. So in terms of your question regarding whether we will realize channels like game shows, I think we need to have further announcements on the ROI of marketing side. So what we want to do is that we want to pursue communication or marketing plans tailored to each IP. So based on this perspective, there could be a chance that some IPs will be beneficial for using -- participating in game shows, but some IPs, it will be not. So our first principle will be focusing on user feedback, utilizing FGT and CBT. And second thing that we need to do for marketing is to consider whether we focus on UA or brand marketing. And third thing is that we have to make specific strategies tailored to each market of the games whether we will utilize channels like game shows or influencers. So based on these principles, we want to strengthen our ROI analysis. One thing I would like to mention is that, there have been some concerns whether we have enough publishing capabilities in terms of the shooter games that we are developing. But there are 3 things that I would like to point out. Although we have done a reduction of head count in a greater scale, but we are going to continue to secure necessary talent, for example, we have appointed our new CEO last year for NCA, and we have recruited many marketing specialists in terms of shooter games through NCW and they have been joined with NCA. So we are going to continue to improve our capabilities on the global marketing side in terms of shooters. And I think there are a few games, some games that need to be focused on the NA and EU markets. So because of that, we have [ investor ] capabilities on the North American side through NCA, and we're going to do the same approach for Europe and South West Asia as well. And as you may know, we have already established a joint venture in Southeast Asia. So throughout these initiatives, we're going to continue to improve our publishing capabilities. And more importantly, we're going to make a cluster of shooter games, as I mentioned before. So although I cannot disclose every details of the project, but until next year, including in-house development games and games that are developed by external partners, there will be 6 titles that will be released in the shooter genre. Of course, all of these games will have different unique game characteristics, but I want to emphasize that we are going to make a cluster of the shooter games.

[Interpreted] The following question will be presented by Kim Jin-Gu from Kiwoom Securities.

[Interpreted] I have a general question regarding your AI road map. And recently, you have revealed LLM for Barco. And I was wondering if you could give us more visibility into your future road map? Do you have a potential to collaborate with external clients? And in terms of cost evaluation, I think if you are going to apply this technology in-house, I think it will be mostly focused on how to utilize this in the game experience. So since you have MMORPG as your legacy genre, maybe if you utilize AI in the gameplay, it will greatly enhance the experience. So I was wondering if you could gave us more visibility into that. So what's your general perspective on this AI technology? What's the potential of this project? And do you have any preparations for that?

[Interpreted] So for your question regarding AI, to be short, I think AI technology is a must, not a choice. And I want to emphasize that for a long period of time, we have focused on developing AI technologies, and we have looked into how these AI technologies can be applied to game development. And thirdly, I think we need to consider how we can define AI generally because there are many types of AI technologies, including open source LLM and vertically applied API technologies. As you may know, for over the past 7 years, we have focused on developing LLM. But last year, of the huge successful launch of ChatGPT, we already see successful LLM models and other APIs in the market. And even before then, our developers have utilized AI technologies in many aspects of game development. More specifically, in terms of art, they have used stable [Technical Difficulty]. And for coding and design, they have used ChatGPT and Copilots. So I could say that most of the developers are using AI technologies when it comes to game development. But for our AI, it has more specialized assets that are tailored to our company, including MMO, sectors and middle-age fantasy. These assets that we have are the strengths that we have for the AI technologies. So we are now focusing more on investing in SLLM development. While for the general ones, we are trying to use open source AI. So I think there are 3 points that we can make for RAI. First, we have a significant level of implementation and cost reduction effects for our AI in terms of game development by applying these technologies into TTS, animation analysis, multilingual chat translation and localization. And second thing is that for operations, we can utilize this AI for analyzing in-game data and using chatbox and spam filtering. And thirdly, it can also greatly enhance the efficiency of the QA process. And the reason why we have spun off our NCAI is because -- it is because we want to make sure that all of our development teams and business teams are going to have the most tailored model for them to use, whether it could be our AI or external API. But I want to emphasize that our AI has a strength in many areas that I mentioned before. So while improving on these strengths, we want to also monetize our technologies by providing the solutions to other developers [Technical Difficulty]. So although we are going to also have publishing deals and investment opportunities with external studios, but we will be able to provide AI technologies at the strength of a publisher. So we can provide support in terms of animation assets, and also, we are already supporting our investee in terms of localization and chat translation for our -- through our AI technologies. And also, we can provide data, AI-based data in-game analysis tool as well. So there are a lot of possibilities that we can consider in terms of monetizing and commercializing this AI solution.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions].

[Interpreted] So thank you for attending our earnings call. And I believe in last year, we have prepared [Technical Difficulty]. And although there have been a lot of cost incurred as a one-off basis, but starting from this year, we will continue to lay a foundation for another leap in the first half of this year. But in the second half of this year, we're going to make a turnaround. And I believe that I think the darkest nights -- the night is darkest right before the sunrise. So I think for the future, we're going to have a brighter future soon in terms of the earnings performance. So we're going to continue to improve our gameplay characteristics and marketing plans. So I would like to continue to ask for your support in this regard. And there are many opportunities, we'll make sure to continue to communicate with our analysts and users, and we'll be open to get honest feedback from our analysts and users. So I think giving an honest user feedback is more important than setting internal goals within ourselves. So through the user indicators, we will make sure to have more accurate levels of targets for our sales. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]