NCSOFT Corporation (036570.KS) Earnings Call Transcript & Summary

I have two questions. For the first question, you mentioned that you're going to have initiatives for mobile platform fee. I was wondering when this will be initiated and which games would this applied. Does this mean that all games on Purple will be applied with that policy? And for the second question, it is about AION 2. I understand that there is a market concern over the lighter BM. However, from the investment perspective, I think because of the lighter business model, this might lead to some concerns over the field. I was wondering how are you going to balance out the two factors?

For the question regarding the platform fee for mobile games, we actually have applied the proprietary payment system for smaller games and ready -- and have completed our testing. But for the big titles like Lineage M, Lineage2M and Lineage W, for the first two titles, as we have mentioned in our disclosure, it will be migrated to the proprietary repayment starting from tomorrow and for Lineage W, it will be applied at the end of November.

And for AION 2, since its launch on November 19, we're going to provide our proprietary system as a default. And of course, if users want to pay through Google and Apple, they will be able to pay through these platforms. So this means that most of our mobile games until November will be able to have the proprietary payments applied for the PC payment. And for monetizing scheme regarding AION 2, we have decided to apply monetization schemes that is less aggressive and more user-friendly. And I believe that for sales, when it comes to sales, I think it's a combination of the user base acquired plus paying ratio. And we believe that for the lighter business model, we will be able to secure more user base. So you will probably know within a week, once we release our title. But for your information, I would like to bring the case of TL. Over the one year, TL has -- we assume that the sales was around $200 million, and their paying ratio and user base was pretty high. And you could see from the stream data about their DAU and concurrent user base. And paying ratio was pretty high, and we believe that TL has accumulated $200 million sales within a year. And second point is that in order to have this kind of sales, we think that the user base must be large and it needs to have high retention. And since AION 2 offers a vast amount of open world, dungeon and content, we believe that the retention will be high and it will be -- remain for a long period of time. I hope you consider these factors when it comes to predictions. I hope you can make calculations based on my statement that I just made.

The following question will be presented by Joshua Kim from CGSI.

I have questions regarding the cost. It seems like the depreciation cost is getting down Q-o-Q and there will be additional costs. And in terms of onetime costs, do you think that this will affect the fourth quarter as well? And for the mobile game proprietary payment system, what is the share of the mobile games that will be applied with the system and when this system will be applied? And for the third question, it seems like even though your working [indiscernible] getting decreasing, but release timing is on track. So I was wondering what contributed to this factor? Was it due to AI?

And regarding the depreciation cost for Lineage W and Blade & Soul 2, the depreciation for their server assets has concluded. So that's why we have seen a decline Q-o-Q and Y-o-Y. And I believe that the same trend will continue. For the labor cost, the last year, as you may know, KRW 100 billion was executed for labor costs. In this year, third quarter, we have done a onetime reduction. And I believe that there will be some items that will be reflected in the fourth quarter. So for the third quarter and fourth quarter this year, we believe that will be around KRW 20 billion. And I believe that BM will continue to mention this, but so far, we've focused on the surgical operations side, which means to improve our structure. And -- but looking forward, we're going to focus on functions and targeted approach to make further adjustments.

And as CFO mentioned, we are seeing continuous decline in terms of depreciation expenses. And for our efforts to reduce cost, we have done a broad-based activities starting from last year. For the server cost wise, we have looked into our games that are using either cloud or our own IDC servers. And based on our close calculations, we decided to allocate each game accordingly. And we will continue to make these kind of efforts to reduce costs. To add on CFO's comments regarding the onetime severance payment, it is KRW 20 billion, but for the third quarter, 60% to 70% of the payments were already reflected and only the small amount of numbers will be reflected in the fourth quarter. And regarding your question about the mobile game share relative to Purple payment, this is kind of confidential information, so I cannot disclose at the moment. However, I want to say that the payment ratio is pretty high for Purple. Of course, there could be some variances depending on the game. Regarding your question about the release schedules getting on track despite the decrease in the workforce, there are two to three factors to this. First, although we have done large-scale voluntary resignation program last year, we have implemented such program based on the strategic decisions and we didn't apply to the products that are important for us in terms of live service games and strategic new titles that are developed by the teams. So we only conducted this program for redundant functions or the products getting dropped or for the support organizations. And another factor is that we have changed our incentive scheme to be based on contribution income starting from last year after we made a spun off for the dev team. Now many developers are aware only with the appropriate number of size of teams and with a quick development schedule, they will be able to have greater contribution income, so that's why I believe that the teams are maintaining the optimal size and cost in order to follow their release timeline. That was all from my side.

The following question will be presented by Junhyun Kim from HSBC.

I have two questions. For the first question, which is regarding AION 2. I was wondering if you could give us more color on their target audiences. I believe that the audience will be different from the mobile and MMORPG games. And since younger audiences in their teens have preferred games that have shorter play time, I was wondering what will be the target audiences? And also, would that impact the service -- the game services that you are currently operating? And for the Shengqu Games collaboration, is this mainly about IP royalties? Or are you considering getting a government license for this game? And I believe that AION Mobile and AION 2 Mobile will be kind of similar. So I was wondering should this be a part of the strategy that you want to make regional extensions for AION 2?

For the AION 2 target audiences, what we have discovered through our FTT is that we are able to appeal this game to our younger audiences. And I think you will be able to see whether this is true when we actually release our game. And as you mentioned, we are fully aware that our younger audiences prefer short play time, and this has been considered in our development. So unlike vintage games that focused on TvP experience, AION 2 is also providing the best amount of PvE experience, which means that if players want to play PvE game instead of putting a lot of time to increase their [indiscernible], they can do so. So I think without explanation, I believe that you will be able to see this result within a week once we release our title. Regarding your question about the AION Mobile that will be codeveloped by Shengqu Games, we hope you understand that this is a mobile game that is supporting the PC AION IP into a mobile platform. And for China release, Shengqu Games will be our publisher, and we will get royalty from them. And if we decide to do the global release for AION Mobile, then we will be the publisher. In that case, we'll have to pay royalty to Shengqu Games. And for AION 2, as I've mentioned before, AION 2 is a title that inherits and build upon the AION IP, but at the same time, it has 36x larger open world map with new dungeons and new box mechanics. And so I believe that AION Mobile and AION 2 are completely different titles. And of course, this is a new title, so we need to get the government license. And I think since the Shengqu Games is going to develop the mobile game of AION, I believe that we can acquire the domestic license. And since we're going to release the same next year by Shengqu Games, I think Shengqu will prepare, and they say that they can get the government license without an issue. So if we don't have any further questions, I would like to start my closing remarks. So far, we've communicated the gains that we are going to publish and develop. And in order to continue to grow our business, we are going to continue to pursue building clusters for different genres, including thrillers and subculture. And since we are going to have release of AION 2 soon, I'm not going to disclose the information at the moment, but there are already the deals that have been confirmed. Regarding subculture, there will be one studio that is prepared to launch the subculture game probably within next year, the end of next year or early two years from now, and we have acquired the investment and publishing deal for that and also MMORPG game as well. So these two deals will be communicated soon after the release of AION 2. And as I've mentioned in the last quarter, we are continuing to making efforts to build cluster for mobile casual gaming sector and pursuing M&A deals. And as a part of that effort, we have recruited [now] and we have established the mobile casual center and currently looking for additional talent. And I believe that we can share more details in the next quarter. But we believe that our mobile casual business could be one of our revenue pillars in this company. And more importantly, we want to create a new ecosystem in the casual market and as a part of that effort, we decided to acquire a new tech platform developed by external company. And to test this platform, we decided to acquire add-on studios domestically and overseas, and we decided to acquire them. And after AION 2, we are going to announce more details. And in order to continue to increase the size of our ecosystem, we decided -- we are currently in talks with two or three candidates for acquisition at a sizable size and we're currently negotiating publishing deals as well. So I hope that we can share more details later once they are solidified in the next quarter's conference call. And so for those of you who are attending this conference, I ask you to come to G-STAR to see our announcements and our lineups and hope to follow -- continue to follow up our news regarding AION 2 that will be released next week. I hope you continue to show your interest and support in our company. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]