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. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on NCSOFT's first quarter of fiscal year 2025 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 first quarter of 2025. We have Co-CEO, BM Park; and CFO, Willy Hong, joining us for today's conference. Now let me begin with the financial highlights. In Q1, sales totaled KRW 360.3 billion, [ down 12% ] Q-o-Q impacted by decreased royalty sales. Year-over-year, sales were 9% lower due to the stable decline in flagship PC and mobile phones. Operating profit recorded KRW 5.2 billion, turning positive quarter-over-quarter, driven by the reduced impact of severance payments. Year-over-year, however, it dropped 80% due to the decrease in sales. Pretax income came in KRW 31.3 billion, turning positive Q-o-Q but 60% lower Y-o-Y. Net income was KRW 37.5 billion, turning profitable Q-o-Q, but down 34% Y-o-Y. The gains on valuation of financial assets and foreign currencies seen last quarter and a year ago did not reflect reducing related income. Moving on to sales by game. Q1 mobile game sales totaled KRW 206.3 billion, 4% lower Q-o-Q. Lineage W recorded an 8% Q-o-Q increase in sales, while Lineage M and Lineage 2M decreased by 7% and 8%, respectively, due to the adjusted business efforts. While our flagship mobile games, Lineage M, 2M and W, have experienced quarterly fluctuations [indiscernible] MAU, which are [ interpreted to the ] gaming ecosystem continued to improve this quarter. Looking ahead, we will focus on extending the PLC of our major [ mobile titles ] by leveraging their solid user base. In Q1, online PC game sales decreased by 11% Q-o-Q to KRW 83.3 billion. This business offers are adjusted across titles and the impact of Guild Wars 2 expansion sales diminished. Royalty sales reported KRW 45 billion, down 39% Q-o-Q, as the impact of TL [ global release ] reflected in the prior quarter, naturally settled. Q1 overseas and royalty sales together represented approximately 37% of total sales. Moving on to operating costs. Q1 operating costs reached KRW 355.1 billion, down 34% Q-o-Q and 5% Y-o-Y. Labor cost was KRW 187.2 billion, down 40% Q-o-Q due to the diminished impact of severance payment and 8% lower Y-o-Y reflected by the reduction in force. Until Q1, headcount optimization cost was reflected for sales growth and motivation, including spin-off compensation and developers [Technical Difficulty]. This has offset some cost reduction results, but starting from next quarter, we expect that further reduction in labor costs will be implemented. Marketing expenses landed at KRW 13.3 billion, down 76% Q-o-Q, driven by the reduced launch marketing efforts where rising 93% from a year ago when promotional activities stayed low. Depreciation declined by 3% Q-o-Q and 9% Y-o-Y, totaling KRW 25.1 billion. Variables and other expenses came in KRW 129.4 billion, down 10% Q-o-Q and 4% Y-o-Y, led by the reduced distribution.

[Interpreted] Good morning, everyone. This is CFO, Willy Hong. Over the past year, since adopting a new co-CEO management system, NCSOFT has implemented a range of initiatives to transform our business fundamentals for a strong performance. First of all, on the cost side, we took a so-called surgical operation measures last year, including 6 spin-offs and headcount reduction at HQ. For this year, we are going to apply some internal treatments for our cost structure. And also, we will streamline our cost item. While furthermore, we've outlined the top line growth strategies and laid the groundwork for its execution this year. Soon, our co-CEO, BM, will address our Q&A sessions regarding this topic. But I want to mention that we presented the sales growth strategies during our previous shareholders' meeting, earnings call and the analyst conference held in April. Today, I'd like to delve into our sales growth strategy. These strategies are underpinned by the 3 main pillars: Legacy IP, New Titles, and M&A opportunities that will generate inorganic growth. First of all, for our Legacy IPs, our goal is to establish a sustainable foundation that fully supports our optimized cost structure through Legacy IPs. When it comes to Legacy IPs, it includes expanding into regional expansion and spinoff games and expanding the Legacy IPs. And through this effort, we are committed to achieving sales in the range of KRW 1.4 trillion to KRW 1.5 trillion per annum using our Legacy IPs. Again, we aim to establish a sustainable business foundation that supports our optimized cost structure in the Legacy IPs alone. Building on the foundation of our Legacy IPs, we aim to reach sales in the range of KRW 600 billion to KRW 1 trillion for new IPs. But from the second half of this year to early next year, we will release 4 new IPs using AION 2 LLL, which is the shooter and [indiscernible] alongside a spin-off game in a short period of time. And beyond that, we will sequentially release unannounced titles. As I have previously mentioned, we've been proactively discussing M&A opportunities to expand into new genres and the global mass market with tangible results expected too. Through these efforts, we believe additional sales and profit growth can be [Technical Difficulty]. For the M&A, we believe that we cannot disclose any details until it's finalized, but we will make sure to communicate with -- this with market soon.

[Interpreted] [Operator Instructions] The first question will be provided by Jae-min Ahn from NH Investment & Securities.

[Interpreted] My name is Jae-min Ahn from NH Securities. Yesterday, AION 2's teaser video was released. And regarding AION 2, how is this game different from our existing Legacy IPs? And what kind of business models or monetization scheme does it have? And also in the MMORPG market, there has been some negative reputation regarding Lineage-like games. And how does AION 2 plan to address these negative reputation? And second question is about reduction in headcount. You mentioned about some one-off costs due to -- in Q1, and there are some measures that were reflected in Q4. Are there additional cost reductions regarding headcount planned for this year?

[Interpreted] So to answer your question -- hello, this is Co-CEO, BM Park. And I will answer the first question, and the second question will be answered by CFO, Hong. As for AION 2, as I mentioned earlier, AION 2 inherits the spirit of AION, the original title. However, at the same time, it fully implements the technical and development advancements that weren't able to be materialized before. Therefore, if you have played AION before, the new AION game will strengthen the PvE and rate aspects, which would be different from Lineage-like games. And as such, you cannot expect to apply a Lineage-like monetization scheme early on in the game. And since this is a game that is targeting the global market and global launch, it will have, of course, some pay-to-win elements, but it would not be like any other Lineage-like games. And as we announced before, we have quite a bit of confidence internally regarding AION 2, and we will be introducing the detailed features through our live streaming broadcast scheduled for May 29. And afterwards, we will also conduct FGT events internally and externally, and we will continue to communicate with our users before launch. So we will leave it up to your decision and judgment. And also the purpose of this FGT, of course, it has to do with receiving feedback for further reinforcements in the game, but it would also be used to garner insights regarding the target user segments that will be used for marketing. And another purpose is to expect a viral effect through this FGT as we are confident about the quality of the game.

[Interpreted] And as for the headcount cost and structure, compared to last year, our employee number decreased by 15%. And on a consolidated basis, we currently have about 4,900 employees. And as Jason mentioned earlier, up until the first quarter, there were some special compensation given to employees affected by the corporate spinoff to boost morale and to promote further sales. And other moral boosting incentives to motivator developers to get ready for the developments in store for the second half of this year. In Q4, there were some increases in our base salaries, and therefore, all of these costs were reflected in the first quarter. From this year, we will be streamlining our cost structure and cost items, and a lot of this will have to do with the headcount measures. For instance, there will be additional streamlining regarding the head count in our overseas subsidiaries. So likewise, we will continue to communicate these efforts through IR and our earnings calls. And to answer your question directly, I am aware of the labor cost consensus currently out there in the market. And we will implement measures to optimize our headcount and labor costs to meet that consensus.

[Interpreted] This is CEO, BM, again. I will add more about labor cost measures. Last year, we had surgical operations that set a foundation that could allow for our early Legacy IPs to sustain our operating profit. However, starting from this year, we will have a more targeted approach in controlling the cost and the organizational efficiency, which will be divided into 2 large pillars. First is to ensure that we can sustain enough operating profit with Legacy IPs alone. And second is to create more organizational efficiency that could allow efficient development and publishing. And as disclosed in our disclosure today, next year, if we are able to expand our sales to a range of KRW 2 trillion to KRW 2.5 trillion, we will make sure that all of these efforts lead to a leverage effect that can maximize our profits.

[Interpreted] The following question will be presented by Dohyoung Kim from CLSA.

[Interpreted] I have 2 questions. Could you provide additional context behind the sales guidance for 2026? It says that through first-party IPs and third-party IPs, the goal of the sales would be KRW 600 billion to KRW 1 trillion. What is the overall sales mix, including AION 2 and other projects, released or unreleased? And of course, it would be difficult to provide an exact standard to forecast performance, but can we understand that this guidance was based on a conservative view? The reason I'm asking is in 2024, PUBG recorded KRW 900 billion in sales. But if so, it seems like in order to make those goals possible, a game like PUBG needs to be released in 2026. So I'm really wondering if this guidance is conservative. And also, on a note about marketing costs, when you assume that marketing cost of 8% of the total sales should be executed, we're guessing 1,600 -- or KRW 160 billion to KRW 200 billion of marketing costs should be executed. Could you provide more guidance on marketing costs as well?

[Interpreted] Thank you for your question. I understand your concerns. Regarding the sales assumption, I will answer them. And regarding the marketing strategy and cost strategy, our CEO, Park, will answer. There are 2 cases -- realistic case and Blue Sky case, which were all reviewed internally and went through the BOD. So these are figures that went through that process. So as for the new IPs, we're expecting a realistic case sales of somewhere between KRW 600 billion to mid KRW 600 billion. And there are 7 IPs currently in the product pipeline to be launched by next year. So -- and as for the Legacy IPs, there are, of course, regional expansions planned for Legacy IPs, but also 3 new titles that will be developed based on these Legacy IPs. But among this number, AION 2 will take account of half of the sales mix. And this was based on a conservative sales assumption. And although it -- although not on par with AION 2, LLL will also take a sizable portion of this mix. We also have an external IP that we will be publishing, which are breakers and time takers. And this was also based on a conservative sales assumption. So although I cannot disclose any details right now, but we do have a global IP base game that is coming up. And the figures for this was extremely conservatively reflected. And during our Annual Analyst Day, we disclosed about the shooter that we're internally developing on top of -- and on top of this, we also have another game that hasn't been announced yet. So when you consider all of these 7 IPs, it's obvious to have a sales mix that exceeds KRW 600 billion. And the -- since 3 spin-offs of our Legacy IPs will be released by 4Q, after 4Q until next year, there are some anticipation in our sales boost. So we believe that there is enough hope to expect our Legacy IPs alone to offset the cost structure that we have. So as for the Blue Sky case, I can't mention anything right now. But I will disclose details in other IR events.

[Interpreted] And I believe that there will be a lot of interest about AION 2. But as for Lineage 2M, the assumptions were based on 1/3 to 1/4 of the 1-year sales for the launch in Korea and Taiwan. And for the assumptions that were used for this, this was based on the global launch expected for the next year and the Taiwan and Korea launch. And since it's -- the figure is 1/3 of this, it's a very conservative number, so conservative enough to disappoint the developers. But we also have a global IP-based MMORPG genre. And since this IP has quite a following globally, I believe this will guarantee a minimum sizable level of sales.

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

[Interpreted] I'm sure that there is a lot of questions regarding the guidance. You mentioned about it's hard to imagine of a new IPs, not exceeding sales size of KRW 600 billion, and that AION 2 and LLL will take a lot of portion of the sales mix, and other IPs also have competitiveness. But I believe that it's still true that AION 2 will have the most importance among this mix because it's frankly difficult for new IPs to scale in the market situations right now. And also, as for LLL, since it's a shooter game, the competition is fierce in this space. And considering the characteristics of MMORPG's business models or monetization schemes have a large impact on users. So do you plan to fully apply the monetization scheme that for launch in the FGT? If not, I think the FGT's impact will be limited. So as for TL, it was difficult to sustain the retention. And the reason why it's -- retention is important is because although TL recorded high traffic and high sales in the beginning, it wasn't able to sustain that. So even if a game reaches a sales goal, if the retention does not keep up, this might have an additional impact.

[Interpreted] So I'd like to correct one thing about the figures -- the sales figures expected for LLL. Although the AION 2 sales forecast is a sizable one, but it -- for LLL, that number was not as high. And in the June FGT, the full launch spec monetization scheme for AION 2 will not be reflected in full, but we are going to gradually release information about the monetization scheme. And we were going to receive feedback from different user segments about this. And as for retention, it's difficult to provide an accurate prediction of retention. But considering the fact that when AION, the original title, was released, it recorded #1 in PC bonds for a consecutive 160 weeks, which means that the game itself has a lot of high retention elements. And in AION 2, we aim to inherit those elements and build on those elements. And in other words, there are a lot of elements that are different from existing MMORPG as the AION 2 will inherit the spirit of AION. And when you reverse calculate the royalties that received through TL after its launch, the global TL sales for 1 year was, I think, more than KRW 400 billion, and this is not including Korea and Taiwan. But as for AION 2, since we're more confident about TL and it has a lot of more content that is different from existing MMORPGs, we believe you can assume retention and -- retention based on those figures. And to answer Mr. Dohyoung Kim's question on marketing strategy, we are taking a quite different approach with our FGTs. It's going to be more targeted and segmented than original FGTs. And as for marketing strategies, we will focus on ROI analysis. And they are -- starting this year, there are multiple measures to make our marketing execution more optimized. And this year, we will lower the portion of marketing cost in the total sales. Our internal goal currently stands at somewhere around 5% to 6% of total sales. So we will continue to communicate our efforts regarding marketing through earnings calls and IR events. And to add more about marketing strategies, up until now, the marketing campaigns were focused on brand mass marketing. It was more of a top-down approach where you have a sales assumption. And then you set a particular percentage of that to be used for marketing budgets and you would set the -- select the UA and brand marketing channels for -- with that budget. Compared to -- since last year, there have been many changes. It's more -- our marketing strategies and budget has been determined by a more data-centric approach, which is -- takes a more bottom-up approach. And we've been actually collecting a lot of data starting last year, and now we're at the stage of executing marketing plans with this data. And through FGTs and CBT events, we aim to garner data on user retention, ARPPU, paying user rates on targeting -- targeted users to implement targeted UA and viral marketing rather than focusing on brand mass marketing. And since currently there are various new platforms different from the past, there is less need to focus on large brand marketing. For instance, for PC, you have Steam, for mobile, we have Google and iOS that are more optimized. And it's important to focus on how to leverage these platforms well. We also have streamers in Discord. So likewise, our basic approach is to move away from the focus on mass brand marketing.

[Interpreted] The following question will be presented by Dohyoung Kim from CLSA.

[Interpreted] I want to ask the marketing question, but that has been addressed.

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

[Interpreted] I had a quick question regarding the sales figure for TL outside of Korea and Taiwan. Is there TL -- you talked about a 1-year sales in the global regions. Is that the actual sales right now? Or is it based on an annualized number of the sales in North America?

[Interpreted] So since it hasn't been a year since the game launched globally, it is an annualized number. But since it has been 8 months of its launch, it's on par with that number.

[Foreign Language]

[Interpreted] As mentioned multiple times before, I think last year was a year of preparation as we implemented a huge surgical operations to reduce cost and to take a select and focused approach in game development and make investments in publishing rights acquisitions in areas that we do have expertise in and also we have pursued M&A efforts. And based on this, we provided a sales guidance for next year, which is an unusual approach. And I'm sure that many of you will have doubts in our plans. And therefore, we wanted to address the concerns by providing guidance for next year. And internally, there is a broad confidence in the games that we are developing. Although you cannot see me in person, I don't know if my authenticity is being delivered to you. But we were confident enough to show the games that we were working on during the analyst IR event. And a part of this, this is why we also provided an earnings guidance for next year. And when you look at the internal atmosphere and the employee morale, I feel that the atmosphere is shifting towards, oh, we should get back on our feet again. And I hope this positive atmosphere could be delivered to those outside of our company. And as working as a CEO in multiple public companies, I've always wondered whether if it's right to provide earnings guidance like this, but the judgment is up to you. But one thing that I could surely say is that we are significantly confident about the plans we have [ moving forward ]. So as it's the darkest before sunrise, we have now passed Q1, Q2 and moving into Q3 and Q4. And we believe we will successfully stage a rebound, and we will work to meet the guidance goals that we presented. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]