Netmarble Corporation (A251270) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is [ B.T. Kim ] from Netmarble's IR team. My sincere gratitude goes to the investors and analysts for taking time out to attend the Q1 earnings session of Netmarble. We have CEO, Young-Sig Kwon; CEO, Seungwon Lee; CBO, Young-Hoon Paek; CFO, Gi-Wook Do; and the Head of Investment Strategy, Mr. ChanSeok Choi, with us today. After the results presentation, they will be addressing your questions. Please note that the contents presented today have yet to undergo a review by an independent auditor and therefore, could be subject to future changes. Now the Head of Investment Strategy, Mr. Choi, will present the results.

[Interpreted] Good afternoon. I will give you the overall Q1 results. Please refer to Page 3. Revenue in Q1 increased 11.6% Y-o-Y and decreased 4.0% Q-o-Q, at KRW 532.9 billion. EBITDA decreased 19.7% Y-o-Y and 38.9% Q-o-Q at KRW 48.4 billion. OP decreased 39.8% Y-o-Y and 60.1% Q-o-Q at KRW 20.4 billion. The Q1 launches were concentrated in March, leading to an increase of marketing spend, which, in turn, led to the decrease of revenue and profit compared to the previous quarter. Next page is on net profit. Q1 net profit recorded KRW 57.5 billion, with controlling shareholders' net profit of KRW 53.9 billion. FX-related nonoperating profit recorded KRW 13.9 billion and dividend income, KRW 10.2 billion and KRW 17.9 billion equity method gain. Next page is on overseas contribution. Q1 overseas revenue was at KRW 377.9 billion. The contribution of our receipt revenue to the overall revenue number stood at 71%, which is a decrease by 1 percentage point compared to the previous quarter. The geographic breakdown is as follows: North America, at 33%; Korea, 29%; Japan, 12%; Europe, 10%; Southeast Asia, 9%; and others at 7%. Next page is on games portfolio. In the first quarter, RPG accounted for 39%; Casual, 27%; MMORPG, 25%; others, 11%. The diversified portfolio continues to be. As of end of Q1, the top revenue-generating titles were: Marvel Contest of Champions, 14%; Seven Deadly Sins, 12%; Lineage 2 Revolution, 11%; Blade & Soul Revolution, 8%; and Cookie Jam, 5%, showing an even distribution. Next is on cost structure. Operating expense in Q1 was at KRW 512.5 billion, which is a 15.5% increase Y-o-Y and 1.7% increase Q-o-Q. Labor cost at KRW 124.5 billion increased 9.3% Y-o-Y and 1.0% Q-o-Q. With new title launches, marketing spend at KRW 95.0 billion saw an increase of 51.3% Y-o-Y and 28.9% Q-on-Q. Now on major lineup for 2020, the company plans an Asian launch of Blade & Soul Revolution within Q2. StoneAge World will be introduced both to the domestic and international markets. In the third quarter, we have plans to launch BTS Universe Story and A3: Still Alive in the global market. And the company's readying itself for domestic launch of Magu 2020. And in the fourth quarter, the company has plans to release Seven Knights II, Seven Knights: Time Wanderer, the Switch version and Ni no Kuni and Marvel Realm of Champions and also Blade & Soul Revolution to the global stage. This concludes the presentation. We will now entertain your questions.

[Foreign Language] The first question will be presented by Dong-hee Kim from Meritz.

[Interpreted] Yes. Two questions. So first is a question related with the Netmarble Together with Press. Have you decided on the timing as to when? And have you also decided on how you're going to have the Netmarble Together with Press conference? And my second question is related to the Seven Deadly Sins. I know that it is getting an enthusiastic response from the global audience. Do you have any plans to launch it to the Chinese market? And -- well, is there a possibility that this title goes to China?

[Interpreted] Yes. This is CEO Kwon speaking. As to your first question on NTP, we were expecting to have this event in Q2 but given this current situation with COVID-19, I think it's quite difficult for us to go ahead with having NTP in the second quarter. So whenever we're out of the woods, we would be having the NTP event in the old way. And now the possible launch of our Seven Deadly Sins title in the Chinese market. Well the same logic applies to not only Seven Deadly Sins but all the Korean titles. I don't think we could disclose or tell you on the timing and the way we are going to start this business in China.

[Foreign Language] The next question will be presented by Eul-Jeong Yun from Shinyoung Securities.

[Interpreted] Yes. Two questions. First question is related to your Seven Knights title. I know that you have plans for Seven Knights II and Seven Knights Revolution and also the Switch version, the Time Wanderer. So could you please tell us the difference between the 3? What is your user target? What is the [ VM ] differences? So please give us more flavor on the difference of the 3. And my second question is related to your marketing expense. You've told us in your presentation that the marketing expense in Q1 has gone up due to the new title launches. And what about your plans or your expectations for your marketing expenses in Q2, Q3 and also Q4? And with your expected global launch, do you foresee any changes in your marketing expense execution?

[Interpreted] Yes. This is CEO Kwon. He will be addressing the first question -- second question, which is on marketing. Yes, it's true that we had spent more amount of marketing in the first quarter. It's because we had big events related to the Seven Deadly Sins and A3: Still Alive. And also, there was marketing activities conducted by Kabam for its activities in China. But in the second quarter, the marketing spend won't be as big as what you have witnessed in the first quarter. And if I may now address your other question, which is on our usage of Seven Knights IP. Well I know that you may have concerns over us preparing for different versions, but the Time Wanderer is a version for Nintendo Switch. It's really differentiated from what we are offering to the mobile platform and as for Time -- Seven Knights II, well, it's a collective-based CCG game. It's an MMO action RPG game, and as for Revolution, it's the more traditional MMORPG. You may see some similarities when it comes to the characters in these 3 different versions but the graphics style is very different as is the game ability. So I don't fear any cannibalization among the 3 versions.

[Foreign Language] The next question will be presented by So-Hye Kim from Hanwha Investment & Securities.

[Interpreted] Yes. My next question is also related to your next new release. As you've mentioned during the presentation that you have planned to launch BTS Universe Story in the third quarter and you've also mentioned Marvel Future Revolution. So could you please give us more detail, more flavor on these 2 titles? What is your expectation for these 2 titles? And what can we expect in terms of time line?

[Interpreted] Yes. This is CEO Seungwon Lee speaking. Well, the BTS title, BTS Universe Story, we use it to support the BTS IP. We are readying for a launch in the third quarter. And as for the genre, well it deserves another occasion to review the genre of the BTS Universe Story. So we will be disclosing the genre in a later stage. And as for Marvel Future Revolution, it's targeting the Marvel fans, and it's, of course, targeting the global market. It's an MMORPG title and we still have to iron out some minor details with Marvel. And our expected release date is slated for 2021.

[Foreign Language] The next question will be presented by Sang-Hyun Lee from IBK.

[Interpreted] Yes. Two questions. First is on the Seven Deadly Sins and the Marvel Contest of Champions. I believe that in certain parts of the world, the gaming industry has been helped by COVID-19. So what were the results for these 2 titles overseas? And my second question is on the delay of the release of Realm of Champions. What is the current development like?

[Interpreted] Yes. This is CEO Seungwon Lee, once again. Now on the global Seven Deadly Sins. We've only launched the title in the global market, including U.S., the Western market and Asia in March. So we cannot really give you a comparison to pre-COVID-19 and post-COVID-19 but I can tell you that the overall results from this title is quite promising. And as for Marvel Contest of Champions, it has grown on a Y-o-Y basis. And it has overachieved our plans. And as to the Marvel Realm of Champions that will -- the movie was expected to be released in the first half of this year but with the outbreak of the pandemic, it has been pushed back. The movie title is expected to be released somewhere around November or December. So naturally, the release of our game title has been put backwards or delayed during the time or until our --- well, while we wait, we're going to add more finishing touches to the title.

[Foreign Language] The next question will be presented by Jong Hwa Sung from eBest.

[Interpreted] I guess, one question. Well, I would like to ask the company to give us more flavor, more color on your Q2 results. You said that you've introduced Seven Deadly Sins through the global audience in March and also you released A3: Still Alive. And with that, there was the focused marketing spending in Q1. And on a Q-o-Q basis, I think the number has increased by somewhere around KRW 20 billion, leading to a less than desirable would-be number. In the second quarter, you also have plans to newly release new titles, well, A3: Still Alive to the global audience. But having said that, I know that your titles are ramped quite high. Seven Deadly Sins, although it has seen some drop in ranking, it's still ranked very high. And A3: Still Alive, it's made top 10 list for Google. And with good performances, these 2 new launches, I believe that your revenue numbers will be seeing more stability. And you, I think, would be spending less on marketing in the second quarter. And will that push up your revenue numbers in the second quarter? And could your OP number recover to the level of Q4 2019?

[Interpreted] Yes. This is CFO Do speaking. Well, as you've correctly mentioned, the new title launches in Q1, they will translate into results for Q2. And as was mentioned by CEO Kwon, we don't expect to see an increase in our marketing spend. And with that, we do expect to see significant turnover when it comes to our OP in the second quarter.

[Interpreted] Yes. This concludes the Q1 2020 earnings session of Netmarble. Please contact the IR team should you have any follow-up questions. Thank you, everyone, for your attendance. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]