NCSOFT Corporation (A036570) Q4 FY2025 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 Fourth Quarter of Fiscal Year 2025 Earnings results.

[Interpreted] Good afternoon, everyone. This is [ Sona ] Park, Head of IR at NCSOFT. Thank you for joining us today to discuss our fourth quarter and full year 2025 financial results. Joining me on the call today are Co-CEO, BM Park; and CFO, Willy Hong. Now let me begin with the financial highlights. Revenue for the fourth quarter totaled KRW 404.2 billion. Mobile revenue accounted for KRW 178.1 billion, and PC revenue reached KRW 168.2 billion. Effective this quarter, Blade & Soul 2 has been removed from the mobile segment, while revenue from Aion 2 is now recognized in our PC business. The PC segment saw significant growth this quarter, catalyzed by the successful launch of Aion 2. While gross billings for Aion 2 reached KRW 94.1 billion in the quarter, reported revenue was recognized at KRW 77.4 billion in accordance with our revenue deferral accounting policy. Even excluding the contribution from Aion 2, our 5 legacy PC titles demonstrated sequential growth, primarily driven by strong expansion pack sales for Guild Wars 2. Q4 operating expenses were KRW 401 billion. Personnel expenses came in at KRW 197.9 billion, and marketing expenses were KRW 52.9 billion. We saw a sequential decline in onetime severance payments. However, this was offset by increased marketing spend related to new title launches and our presence at G-STAR. Q4 operating income was KRW 3.2 billion with a net loss of KRW 1.5 billion. It was primarily driven by a spike in corporate tax expenses for the quarter resulted from a timing difference where deferred revenue from Aion 2 was recognized as taxable income. For the full year 2025, total revenue was KRW 1.5069 trillion. Mobile revenue contributed KRW 794.4 billion and PC revenue totaled KRW 430.9 billion. On an annual basis, our legacy PC portfolio grew year-over-year even without the inclusion of Aion 2, reaffirming the enduring strength of our core IPs. Throughout the year, we remained disciplined in our company-wide cost efficiency efforts. As a result, annual operating expenses decreased 12% year-over-year. Personnel and marketing expenses declined by 14% and 18%, respectively, while variable costs and depreciation also trended lower. Consequently, operating income turned profitable, recording KRW 16.1 billion. Excluding the impact of approximately KRW 20 billion in onetime severance payments, full year 2025 operating income stood at KRW 36.9 billion. Pretax income and net income were KRW 461.4 billion and KRW 347.4 billion, respectively. These figures reflect a onetime gain from the sale of the Samseong-dong NC Tower, along with the associated tax impact. That concludes our financial review.

[Interpreted] Hello, everyone. This is CFO Willy Hong. Before we start our Q&A session joined by our Co-CEO, BM Park, I'm going to briefly cover our targets for this year. If 2025 was a turnaround year for NCSOFT, 2026 marks the beginning of accelerated growth. We are aiming for the upper bound of our previously issued revenue guidance ranging from KRW 2 trillion to KRW 2.5 trillion. We expect to drive this through 3 primary pillars: expanding the revenue of our existing IP, launching new IP globally and accelerating our mobile casual business. First, expanding the revenue of our core IP. This year, we'll see the first full year revenue contribution from Aion 2. Furthermore, we are targeting a major global launch for Aion 2 in the third quarter. To spearhead this effort, we have recruited Merv, who previously led the Lost Ark and TL business units at Amazon Games, and we are scaling our internal global publishing capabilities to ensure top-tier executions. Additionally, we are set to fortify our legacy IP base through regional expansion and spin-offs. This includes the official launch of Lineage Classic Tomorrow along with Guild Wars Reforged Mobile and the Shengqu Games developed Aion Mobile. In total, we plan to release 5 spin-off titles this year. We are also expanding our geographic footprint by bringing Lineage W to Southeast Asia, Lineage 2M and Lineage M to China and TL and Lineage W to the Russian market. Second, releasing global new IP. Time Takers, Breakers and Cinder City are entering the final stages of production. We will commence global CBT in March and throughout Q2. Based on these results, we anticipate a staggered global rollout starting late in the second quarter. This marks a pivotal shift as we target new user bases in territories across the PVP shooter subculture and [ MMORPGs ] genres. First, accelerating our mobile casual business. We are aggressively building the mobile casual ecosystem by acquiring high-growth studios in the global market. Our strategy is to create a virtuous cycle where ad creative, UA, data analytics and tech layer are organically integrated to maximize synergies between individual studios and our central platform. Our recent acquisitions, Lihuhu in Vietnam and Springcomes in Korea, will be reflected in our financial results starting in Q1. Furthermore, our long-pursued M&A activity in Europe is in its final stages with an expected financial impact as early as Q2. We are committed to converting our idle cash reserves into operating assets that will generate meaningful revenue and earnings starting this year. Looking ahead, our momentum continues into 2027 and beyond. This includes Horizon Steel Frontiers, which is an MMO based on the Horizon IP, our next-generation shooter Bonfire, the subculture titled Project AT by Dynamis One and the new MMO Project R developed by Dexa Studio. We will also continue to diversify our portfolio with additional Roguelike and FPS titles through both in-house development and third-party publishing. I look forward to discussing these initiatives in more detail alongside our Co-CEO, BM Park.

[Interpreted] So before I move on to our Q&A session, I would like to talk about the prospects for this year and next year. As I promised before, as of 2025, we focused on preparing ourselves for the accelerated growth, and we focused on our initiatives for optimizing cost and organization and improving the quality of our games. As you may know, starting with Aion 2, which was released in Q4 last year, we have started to gain trust back from our users. And with our new IPs, we are going to continuously operate our titles with user-friendly policy. As Willy just mentioned, our company will drive 3 pillars of revenue growth, which includes MMORPG, shooter subculture cluster and mobile casual business. For our mobile casual business, it is not just about beginning, but we are going to solidify our efforts to accelerate such business so that next year, we're going to make sure that this accounts for 1/3 of total revenues of our company. So as I've mentioned, our sales guidance was ranging from KRW 2 trillion to KRW 2.5 trillion, but we think that there's a high possibility that we can achieve the upper end of our sales guidance, which is KRW 2.5 trillion, through 3 pillars of revenue that I just mentioned. Through these efforts, we will be able to not only achieve sequential growth but achieve Y-o-Y growth this year. And as a result, our operating margin will improve as well. Having said that, in order to achieve revenue growth, we need to also make more spending on investments such as in incentives and marketing spend and UA spend for our mobile casual business growth and as well as our M&A opportunities. And for every quarter, however, we were going to achieve growth for the operating income perspective. We're currently discussing M&A deals. Such valuation could be reflected in both intangible and operating assets. And if we decide to have more emphasis on intangible assets, we're going to communicate through IR events, including not only operating income but also EBITDA. So far, NCSOFT has worked as a traditional content company, which means that our individual game title successes and failures have greatly affected our share prices. But looking forward, you may know from our quarterly results, we will be able to achieve more predictable revenue and profit growth. And I hope that when you are analyzing our share prices, you'll look through the lens of profitability and sustainability of our revenues. That concludes my opening remarks. Now moving on to our Q&A session.

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

[Interpreted] I have 2 questions. My first question is about Aion 2. You mentioned about the system being more sustainable and predictable for revenue, and I believe that the business model that Aion 2 is taking is aligned with that strategy. And I believe that recently there was a news saying that the retention membership was around 500,000 to 600,000. I was wondering if you could give us more visibility into this retention trend. And how much do you think the revenue will be generated based on the retention number that is gathered this time for Korea and Taiwan? And you mentioned that the Aion 2 will be released globally in the third quarter. So based on the first 12 months period, do you think the revenue will be much bigger than the size of Korea and Taiwan? And my second question is about the mobile casual business that you mentioned as one of the 3 pillars. And you mentioned that it will account for 1/3 of the total revenue that will be generated next year. So is this mainly about organic growth driven by new titles? Or would it be contributed by inorganic growth? And what will be the key success factors of this business? And could you give us your insights why do you think that NCSOFT will be good at mobile casual sector?

[Interpreted] So regarding your first question, because of our Korea's disclosure policy, we cannot give you detailed numbers about the indicators, but I would like to give you some details regarding our metrics. As of January 3, we announced that the characters who bought membership was amounted to 1 million. And as of February 9, this number increased to 1.5 million. And revenue-wise, starting from the launch, which was made on November 19, to the end of December, gross billings have recorded KRW 94.1 billion, while the accounted revenue was KRW 77.4 billion. And starting from January 1 to up to today, we expect the revenue will be around KRW 70 billion. Unlike the traditional trend of MMORPGs where we usually see a natural decline of the user numbers, Aion 2 is significantly maintaining the user base. And this is promising considering the fact that we have suspended getting new users over the past 2 weeks because of the bot issues. And regarding Korea and Taiwanese market, I think you can assume the revenues based on the numbers that I gave you right now. And for the 12 months of release of the global launch of Aion 2, although considering that the Throne and Liberty had lower indicators initially compared to Aion 2, when it comes to Throne and Liberty, within th 3 months in Amazon, revenue was generated up to KRW 150 billion. And since Aion 2 has better indicators than that, I believe that you will be able to expect great revenues, which will be released probably in September or in the third quarter of this year. And regarding mobile casual sector, we actually started to pursue M&A opportunities 2 years ago. And starting with July last year, we have changed our strategy for mobile casual business by recruiting Anel, who has great industry expertise and know-how, and we have appointed Anel as the Mobile Casual Center Head. And regarding mobile casual sector, more important elements beyond IP is data analytics capabilities and how we can well operate UA marketing and monetization and live ops based on such data. Since NCSOFT has a 30-year history of data analytics and great AI capabilities, we think that we are well positioned to pursue this business. And once Anel joined our company, the first thing he did was not about acquiring gaming businesses, but focused on acquiring the software of the tech platform for mobile casual business, and we are currently working on developing our own tech platform based on the software. And in order to make the tech platform successful, we believe that critical mass is important when it comes to data analytics. And that's why we have acquired studios like Lihuhu and Springcomes last year. That was just the beginning. And as Willy just mentioned, we are currently in the final stages of acquiring a sizable mobile casual studio, and we hope that we will be able to communicate this soon to the market. And hopefully, for the first quarter, we will be able to secure critical mass, and then we will be able to create synergy effects with our acquired studios through our tech platform. And we will go through PMI strategies and not only improving our fundamentals, but hopefully, we want to make additional revenues coming from these studios this year. And we are confident that we will be able to secure critical mass and more know-how in this sector. And starting from the second half of this year, we will be able to start our publishing efforts for a big sized mobile casual IP. And we are already making conversations with potential target studios. And probably within the second quarter or third quarter, we will be able to finish POC and continue to initiate our publishing efforts. So to circle back to your question about the mobile casual sector, we'll be able to achieve the 1/3 of total revenue next year. The starting point will be achieved through inorganic growth through M&A opportunities. However, we are going to pursue efforts to increase organic growth as well. And if needed, we will be able to add more new titles in this portfolio. And as I've mentioned before, for the mobile casual business, we think it's not about successfully executing brand marketing for the IP, but it is about successfully analyzing big data and automating the development through AI technologies. I believe these 2 elements are the key success factors. Since NCSOFT has a 30-year history of operating live service games with great data analytics skills, combined with our advanced AI technologies, we will be able to achieve successful launches of mobile games. And with the know-how gained by our mobile casual center head and additional talent that will be joining our team, we will be able to achieve this goal. I hope this helps. I just want to emphasize that we -- this is the work that we have put our thoughts and heads over the past 2 years.

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

[Interpreted] I have a question regarding the sales guidance that you have just mentioned, which was about the upper end of KRW 2.5 trillion. I expect that you're assuming that you will be able to achieve great revenue growth. I was wondering what will be the biggest contribution, coming from which title? And what will be the revenue mix between the existing IPs and new IPs? And considering the history of delays in the previous titles, I was wondering how confident are you with the slate of the new releases that are in your lineup? And is the delay risk reflected in your guidance? And since there is a short cycle of releases, I was wondering maybe you have to increase the publishing capabilities. So what is your strategy on that? And regarding the casual side, the competition is quite fierce in the market, and due to AI advancements, many developers, including independent developers are joining the market. So there is a lot of supply of games that are in the market. So I was wondering what would be your differentiating factors for your games in this market?

[Interpreted] And regarding your first question, as I mentioned last year, we have conducted cost optimization programs, which means that even if the revenues will go -- has gone down to KRW 1.5 trillion range, we will be able to achieve breakeven points. And this includes our strategies for new regional launches and spin-offs. And the remaining ones will be contributed from new IPs. And the biggest contribution will likely come from Aion 2 and some of them will come from Cinder City. And Cinder City and Breakers and Time Takers, their global CBT is scheduled for March and throughout the second quarter. Depending on the results of CBT, there could be some changes to our time line of releases. However, I want to reemphasize that before we conduct our global CBT, already we have done multiple FFTs internally and externally. So we believe that the results will be positive from global CBTs. And we expect that mobile casual sector will also have meaningful contributions to our KRW 2.5 trillion revenue guidance.

[Interpreted] So regarding your second question, which was about whether we have the publishing capabilities, I believe that your question is geared towards our global publishing capabilities. With that in mind, as I've mentioned before, for NCA, we have appointed Jeonghee Jin as the CEO to make sure that we have the front line of publishing capabilities in the North America and European regions. And as we have announced today, Merv from -- who previously served the global publishing unit at Amazon Games, have joined today for our company. And with his network, we will be able to secure more talent in terms of global publishing capabilities. And he is already familiar with our NCSOFT games. And so the onboarding time will be pretty short because he already communicated well with our development teams. And not only in NCA, but also in NC Europe, we have recruited [indiscernible], who was ex-employee at NCSOFT, to enhance our publishing capabilities in these regions. I hope that you continue to show interest in our future endeavors in terms of global publishing.

[Interpreted] And regarding your question about the mobile casual business, it's not about just keep supplying new games constantly, but it is about creating an ecosystem of mobile casual games. So for example, our Mobile Casual Head, Anel, he's a seasoned industry veteran who has specialties in ad tech. And for the studio that we are trying to acquire, they have great technologies in terms of delivering games to the exact user segments and improving live ops by -- in order to increase better retention. So when it comes to AI advancements, I think it is better for us because I think more -- when more games are launched by the smaller-sized studios, it will be rather an advantage for us.

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

[Interpreted] I have a question regarding Aion 2. Traditionally, I guess, typically, MMORPG tend to have rapid metrics trending downwards initially. But when it comes to Aion 2, they are maintaining stable metrics. So that's very promising, and thank you for sharing that. So I have a question regarding that. Do you think that even though there will be some declines in revenues at a Q-o-Q level, do you think that the decreases will be stabilized in the future? And regarding the life cycle of the product, I guess it is more about how prepared -- well prepared are you in terms of pipeline of the content that can continuously engage our users. However, I was wondering if you could give us more visibility into the road map? And how long do you think that Aion 2 will be maintained? And do you have any visibility that you can share with us regarding your global release operation plans?

[Interpreted] So regarding your question, when it comes to sales breakdown, I cannot give you details regarding the numbers. However, most of the revenues are coming from membership at the moment. In January, mid-January, we have updated Season 2, and many of our users have bought cosmetics with that update and we recorded higher revenue even compared to the first day of release. In terms of life cycle, as we mentioned in our live streams, the season will be updated every 2 months, and we will be providing a variety of content that can be enjoyed by our new users. And we will also reveal new work on a periodic basis so that our users can get continuously engaged with our game. Traditionally, when it comes to MMORPGs, the business model focused on pay-to-win mechanics. Because of that, for a certain period of time, when a certain period of time has passed, high-level users remain while low-level users tend to leave. For Aion 2, we have PBE content. So regardless of their levels and skills, all types of players can enjoy our game. And plus, we have PBE content that can be enjoyed by high-level users. So we are currently making a good balance between the 2 factors, and we are also considering business model with that factor in mind. So regarding content pipeline, I don't think that's an issue because we already have know-how in servicing our games for more than 20 years. But there are some minor issues such as bots. And in order to address those challenges, we're continuously sophisticating our strategy to suspend those bots. And we are continuously improving our gameplay experience so that new users can enjoy our game as well. And regarding the global release of Aion 2, Aion 2's business model and game plan mechanics were designed from scratch with the global release in mind. So we believe that at a high level, it wouldn't significantly change. However, we will have some minor tweaks by communicating with Mervin.

[Interpreted] The following question will be presented by Seyon Park from Morgan Stanley.

[Interpreted] I have a question regarding Lineage Classic. It seems like the ranking in PC cafes is pretty high, but due to some negative feedback coming from our streamers, this, I think, have impacted your share prices. So I was wondering if you could give us your take on the user response and how much this could contribute to your revenue.

[Interpreted] Regarding Lineage Classic, the official launch will be happening tomorrow. So I believe that you will be able to gather meaningful indicators tomorrow. But personally, I think the negative feedback from our streamers is quite unfair, and this was -- the same thing happened for Aion 2 release. And from the management level, I'm tracking data in a real-time basis and the data at the moment is quite similar or even higher than our expectations. And I'm personally playing Aion 2 and Lineage Classic. It was quite fun for me. And please keep in mind that the target user of Lineage Classic is not younger audiences, but it is focused more on the returning users who have played the title IP before. So I hope that we will be able to communicate our metrics in detail once the game is released. And to give you more guidance regarding our revenue, we are considering Lineage Classic as part of our PC Lineage IP. And there could be some minor cannibalization impact, but we believe that in the total aspect of PC Lineage, the revenue will be greater than last year.

[Interpreted] There are no questions in the queue right now.

[Interpreted] So lastly, as I -- I continuously joined earnings call conference in the past and I want to emphasize that I have fulfilled all the promises that I made in the previous calls. And I will do my best to achieve the upper end of the revenue guidance that was shared for this year. And I expect that we will be not only achieving sequential growth, but also achieving revenue growth in 2027 as well. I hope that you continue to see us not as the content company that focuses on individual games, but as a company who can generate sustainable growth. Thank you.

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

[Interpreted] I have 2 questions. First one is about costs. I was wondering if there's going to be any changes to the personnel expenses given that you are going to make new investments? Or whether you're going to continue to pursue the conservative approach to managing personnel expenses? And you mentioned that you have introduced proprietary payment system for the PC titles? And given the marketing spend of the new titles, could you give us more color on to your marketing spend and payment expenses going forward? And the second question is about AI technologies. You mentioned that in the short-term impact wouldn't be made for AI technologies, but given the emerging technologies just like Project Genie, what's your take on the future impact of AI technologies?

[Interpreted] And regarding your first question, cost optimization-wise, we are strictly controlling. So even if we increase our investments, it doesn't mean that it will directly translate into increases in our personnel expenses. However, since we are expecting that many of our titles will be successful, there will be some incentives given to our dev teams. So headcount-wise, it will not increase, but incentive-wise, it may increase. And I think that's a positive thing. And regarding the proprietary payment system, since Aion 2 has introduced the system from the beginning, the share of proprietary payment is around 80%. But for the 3 mobile titles, many of our users are still getting incentives by using Google and Apple. So the conversion rate is not that high, which is around 20% to 40%. But this year, by going through various efforts, we will try to increase the share of proprietary payment system. And regarding marketing spend, last year, we have maintained a disciplined approach for our brand marketing activities. And this year, even with new title releases, we don't think that the marketing spend will greatly increase. However, for the mobile casual sector, in order to grow mobile casual titles, UA marketing is very important. So if we make more investments in the mobile casual sector, UA spend will likely to increase. However, these increases will be covered within the range that we can accommodate and control operating margin. So regarding your question about AI technologies, I was actually on my business trip last week and I saw the news that Project Genie came out, and this impacted the share prices of companies like Unity, Take-Two and as well as our company. And I even asked AI about this. And I think personally, market is overreacting to this. I guess there would be a 2 parter to this question. First, when it comes to AAA games, I don't think that AI completely -- cannot completely replace the development process because AAA games require sophisticated system design, characters, and still many users are not welcoming the assets created by AI. So this could, of course, contribute to the productivity enhancement, but still AI cannot create games like GTA 6. And of course, we have our NC AI subsidiary. And this year, we are going to initiate a task force to increase productivity with AI technologies combined with our own AI models, plus open-source AI technologies. And as for mobile casual side, of course, AI can generate a lot of different content. However, from our strategy perspective, what we are trying to do is building an ecosystem where our users and development teams can benefit from it through our advanced tech platform. So the more games will come out in the market, the better for us to have the leverages. So all in all, I think market is kind of overreacting to Project Genie. And I believe that whether it's AAA games or mobile casual games, we think that AI technology will be a benefit for us. So without further questions, thank you all for participating. And looking forward, I would love to have more meaningful conversations in the next earnings call results based on the -- how we can achieve quarterly growth. Thank you.