Netmarble Corporation (A251270) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal Year 2020 second quarter earnings results by Netmarble. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 second quarter earnings results by Netmarble.

[Foreign Language]

[Interpreted] This is [ B.T. Kim ] from Netmarble IR team. I sincerely thank the investors and analysts for taking time out to attend the 2020 Q2 earnings release session of Netmarble. We have here with us CEO, Kwon Young-Sig; CEO, Lee Seungwon; CBO, Paek Young-Hoon; CFO, Do Gi-Wook; and Head of Investment Strategy, ChanSeok Choi, who will be addressing your questions after the presentation. Please note that the content presented today have yet to undergo an independent auditor's review and therefore could be subject to changes in the future. With that, we will hear the presentation from the Head of Investment and Strategy, ChanSeok Choi.

[Foreign Language]

[Interpreted] Good afternoon. I will now give you the summary of Q2 results. Please refer to Page 3. Revenue in Q2 increased 30.3% Y-o-Y and 28.7% Q-on-Q at KRW 685.7 billion. EBITDA increased 75.8% Y-o-Y and 126.2% Q-o-Q with KRW 109.5 billion. Operating profit increased 146.1% Y-o-Y and 300.5% Q-o-Q at KRW 81.7 billion. With the full reflection of Q1 launches in the second quarter and with new launches, the quarterly revenue and operating profit increased over the previous year.

[Foreign Language]

[Interpreted] Next page is on net profit. Net profit for Q2 is at KRW 85.2 billion with controlling shareholder net profit at KRW 75.3 billion.

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[Interpreted] Next page is on overseas revenue contribution. Second quarter overseas revenue recorded KRW 514.4 billion, which is 75% of the overall contribution numbers. This is a 4 percentage point increase over the previous period. The geographic breakdown is as follows: North America, 36%; Korea, 25%; Europe, 12%; Southeast Asia, 11%; Japan, 10%; and others 6%. With the success of The Seven Deadly Sins: Grand Cross revenue contribution from North America and Europe rose 3 percentage points and 2 percentage points, respectively.

[Foreign Language]

[Interpreted] Next page is on game portfolio. As of second quarter, the company continues to maintain a well-diversified portfolio with RPG 41%, 25% MMORPG, 25% Casual and 9% Casual (sic) [ Others ]. The top revenue contributing titles as of Q2 were well spread out with The Seven Deadly Sins: Grant Cross 21%; Marvel Contest of Champions 13%; Blade & Soul Revolution 9%; Lineage 2 Revolution 8%; and A3: Still Alive 6%.

[Foreign Language]

[Interpreted] Next page is on major cost structure. The operating cost in Q2 was at KRW 604.0 billion, which is 22.5% increase Y-o-Y and 17.9% increase Q-o-Q. Labor cost was at KRW 131.2 billion, which has seen an increase of 9.8% Y-o-Y and 5.5% Q-o-Q with added head count for overseas studios. Marketing expense at KRW 124.9 billion increased 49.4% Y-o-Y and 31.5% Q-o-Q with expanded marketing activities in the North American market.

[Foreign Language]

[Interpreted] Now on the major line up for 2020. The company launched Magumagu 2020 in the domestic market on July 8. BTS Universe Story will be introduced to the global audience, excluding China in the third quarter. There will be preparations for Seven Knights II release in Korea and Seven Knights-Time Wanderer, the Nintendo Switch version of Seven Knights in the fourth quarter. Lastly, Marvel Realm of Champions is expected to be in the global market, excluding China, and A3: Still Alive will be ready for the global market except for Korea and China.

[Foreign Language]

[Interpreted] This concludes the results presentation. Now the company will address your questions. Thank you.

[Foreign Language] [Operator Instructions] The first question will be provided by Sang-Hyun Lee from IBK Securities.

[Foreign Language]

[Interpreted] Yes. I have 2 questions. The first, what would be the traffic forecast and your revenue forecast in the third quarter for your existing titles? And the second question is as follows. I believe that you have plans for bigger titles in the second half. So with that, how would your marketing cost change?

[Foreign Language]

[Interpreted] So this is CEO, Kwon addressing your question. I believe that your question is on the full reflection of Seven Deadly Sins in the second quarter and A3: Still Alive in the second quarter with that full reflection and its results continue until the third quarter. Yes, after the initial launch, we do see some slight decrease, but I don't foresee any big changes to our numbers going forward. And as for third quarter marketing cost, as was illustrated during the presentation, we have launched Magumagu 2020, and we are going to launch BTS Universe. And I don't foresee a big element of increase going forward when it comes to our marketing costs. So I think it would be a main [indiscernible] a slight decrease.

[Foreign Language] The next question will be provided by Stanley Yang from JPMorgan.

[Foreign Language]

[Interpreted] Yes. I have 2 questions. First is in regards to Seven Deadly Sins. I believe the results from Seven Deadly Sins [indiscernible] far than expectation. So could you give us a breakdown of how the different geographies performed. And you did mention a slight decrease in the third quarter, does the slight decrease cover the results for Seven Deadly Sins as well. And now the second question is related to your BTS title. Was it developed in-house? And what type of game is it? And is it different from the previous BTS title that you have introduced? And what's the management's expectation for this type of title?

[Foreign Language]

[Interpreted] Yes. I would address -- this is CEO, Kwon. I would address your first question in regards to Seven Deadly Sins. Yes, I did mention a slight decrease in the third quarter over the second quarter. It does include Seven Deadly Sins results as well. And well, I cannot give you the detailed breakdown per market per country but The Seven Deadly Sins title, it uses a global international build for all locations, excluding Korea and Japan and offset international build, U.S. and Europe accounts for 70% of the overall revenue.

[Foreign Language]

[Interpreted] And if I may take your second question, which was on our BTS Universe Story. Well, it's being developed by Netmarble master and it's a sandbox type story title. And I believe that the BTS fans will find it easy and fun to play. So we've made it easier for the BTS fans to approach.

[Foreign Language] The next question will be provided by Jingu Kim from KTB Investment Securities.

[Foreign Language]

[Interpreted] Yes. 2 questions. First, I believe that the game industry or the game market has seen some growth with COVID-19. And I think that the COVID-19, the pandemic has influenced how you procure or acquire your users and your revenue. And for the new titles to be launched after COVID-19, do you have a specific strategy in acquiring your users? And do you also have a strategy to increase your revenue? And my second for question's related to marketing. But also with COVID-19, I believe that CPI cost have seen a decrease so far. So did it influence your marketing cost and marketing expenses as well. And do you have a guideline as to your marketing spending to revenue?

[Foreign Language]

[Interpreted] Yes. This is CEO, Young-Sig addressing your question. Yes, with the pandemic COVID-19, that did push up the game industry, did act as a positive factor when it comes to game business because game business is also attractive business and attract industry. And we do have some separations for live games and new titles when it comes to our market strategy. And in the second quarter, we have been rather aggressive in terms of marketing spend for our live titles, especially the live that do well in North America. And in executing our marketing budget, we always keep a keen eye on our return on ad spend. The current changes in the environment with the pandemic did not really lead to actual changes in our marketing pattern and marketing methodology. And as -- while this, I believe, addresses your marketing to revenue question, and well, especially for our live titles, live games, we always keep a keen eye on how it's adequately executed. And within this execution level, we do increase or some marketing spending, if we do see a favorable move with our added investments.

[Foreign Language] The next question will be provided by Dong-hee Kim from Meritz Securities.

[Foreign Language]

[Interpreted] Two questions. First is on your investments. I believe that you have shares and behind a couple of games companies are expecting an IPO for this year. So do you have any plans to release your existing shares on these companies, and if so, are you going to reinvest the proceeds? And my second question is also related to COVID-19. Does the COVID-19 have any influence on your launch date, scheduled for the second quarter or the second half?

[Foreign Language]

[Interpreted] Yes. This is CEO, Young-Sig once again, addressing your question. We have not to review the possibility of our share sales when it comes to our holdings on [ vacate and carco ] games. And for your second question, well, because of COVID-19, we were not at all influenced when it comes to new title and new developments or -- but there were some glitches in terms of marketing aspects such as delayed the recording of voice actors in the Japanese market. Next question, please.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] The next question will be provided by Jong Hwa Sung from eBest Investment Securities.

[Foreign Language]

[Interpreted] Yes. First of all, congratulate on the stellar performance. While, I see some negative numbers when it comes to corporate tax for both the first quarter and the second quarter. Please give us some more flavor or more color on your effective tax rate when it comes to your corporate tax payment.

[Foreign Language]

[Interpreted] Yes. This is CFO, Do Gi-Wook addressing your question regards to the tax negative numbers in the second quarter. We will be funded some of the past corporate taxes that we have already paid and starting from first quarter and second quarter, it will go back to the normal rates that we have paid before. Next question, please.

[Foreign Language] The next question will be provided by Jinman Lee from SK Securities.

[Foreign Language]

[Interpreted] Yes. I would also reiterate congratulations for your good performance in the second quarter. And my questions is for your new titles to be launched including Ni no Kuni and the Seven Knights Revolution. Well, aside from these 2 plan launches, do you have plans for any other new titles? And could you please share the information with us?

[Foreign Language]

[Interpreted] Yes, this is Kwon speaking again. So for the title Ni no Kuni, we have plans to simultaneously launch the title in Korea, Japan and Taiwan market in the first quarter next year. And we also have similar plans for the first half launch of Seven Knights Revolution. And as was mentioned by CEO, Lee Seungwon, a -- we do have slight glitches when it comes to dubbing issue for the Japanese market, but the title is being ready for a simultaneous launch in Japan and Korea. And everything is underway for the first half launch. So I think it will become a tangible thing.

[Foreign Language]

[Interpreted] And as for our other line ups, we do have a plan for other line ups but we did not have the right opportunity or the right occasion to this growth dissemination and at the right timing at the right place, we will make this information available to you. Next question, please.

[Foreign Language] That will be our last question for the session. We will end the call with closing comments from the host.

[Foreign Language]

[Interpreted] This concluded 2020 earnings release section from Netmarble. Should you have any further questions, please contact the IR team. I once again thank you for your attendance. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]