Netmarble Corporation (A251270) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Nicky Kim from Netmarble's IR team. I sincerely thank the shareholders and analysts for participating in Q1 earnings session of Netmarble. Today, here with us are CEO, Young-Sig Kwon; and Seungwon Lee; CBO, Young-Hoon Paek; and CFO, Gi-Wook Do. They will be addressing your questions after the results presentation. Please note that the contents presented today have yet to undergo an independent auditor's review and could be subject to changes upon such review. With that, CFO, Gi-Wook Do, will give the presentation.

[Interpreted] Good afternoon. I will first give you our overall first quarter results. Revenue in the third quarter increased 7.0% Y-o-Y and decreased 8.6% Q-o-Q at KRW 570.4 billion. EBITDA increased 65.9% Y-o-Y and decreased 28.0% at KRW 80.3 billion. Operating profit increased 165.7% Y-o-Y and decreased 34.3% Q-o-Q at KRW 54.2 billion. New title launch effect was partly reflected and the existing titles saw downward stabilization, leading to smaller revenue and consequent decrease in operating profit. Next page is on net profit. Net profit for Q1 is at KRW 61.9 billion, and controlling shareholder profit was at KRW 56.4 billion. The nonoperating profit for equity method gain is KRW 22.3 billion and dividend income is at KRW 16.7 billion, bringing the total to KRW 40.4 billion. Next page is on overseas contribution to revenue. Overseas revenue for the first quarter was at KRW 402.3 billion. It accounts for 71% of overall revenue, which is a 4 percentage point increase over the previous quarter. The regional breakdown is as follows: North America, 36%; Korea, 29%; Europe, 12%; Japan, 9%; Southeast Asia, 9%; and Others, 5%. With the Seven Deadly Sins: Grand Cross update, the North American contribution to sales rose 3 percentage points over the previous quarter. Next page is on game portfolio. The breakdown for Q1 is as follows: RPG, 34%; MMORPG, 30%; Casual, 26%; Others, 10%. The portfolio remains diversified. Revenue-wise high ranking title as of end of Q1 is as follows: Seven Deadly Sins: Grand Cross, 15%; Marvel Contest of Champions, 12%; Seven Knights 2, 11%; Lineage 2 Revolution, 8%; Blade & Soul Revolution, 6%; Harry Potter, 5%; and A3: Still Alive 5%. Next page is on major cost structure. Operating expense in the first quarter was at KRW 516.2 billion, which is a 0.7% increase Y-o-Y and 4.7% decrease Q-o-Q. Commissions at KRW 234.2 billion increased 3.1% Y-o-Y and decreased 5.0% Q-o-Q. Revenue increased with the update of Seven Deadly Sins: Grand Cross. And with that, our commissions proportion increased over the previous quarter. Labor at KRW 143.4 billion, reflects new recruitment for new titles and the rise in wages for management and staff. It is a 15.2% increase Y-o-Y and 4.1% increase Q-o-Q. Marketing cost recorded KRW 77.6 billion. With limited big title launches, it decreased 18.3% Y-o-Y and 10.6% Q-o-Q. Now on our new titles line up. Ni no Kuni: Cross Worlds have begun preregistration in April 14. The game is expected to simultaneously launch in Korea, Japan and Taiwan in June. In the second half, Marvel Future Revolution will be introduced to the global audience, ex China. Seven Knights Revolution is scheduled for a simultaneous release in Korea and Japan in the second half. And also in the second half, the company is planning to introduce a hybrid rhythm action game, tentatively named BTS Dream to the global market, except China, and also Merge Kuya Island, a casual merge genre title that allows players to decorate their islands with different objects. This concludes our presentation. Should you have any questions, we will be addressing them.

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

[Interpreted] Yes. I will give you the translation of the first question. First, on the Marvel Contest of Champions and Seven Knights, I see that the sales number associated with these 2 titles have seen a decrease. What is the reason behind this decrease? And what is your outlook for the second quarter?

[Interpreted] Yes. This is Seungwon Lee addressing your first question. First, Marvel Contest of Champions, this title had always had a seasonality to it. So for several years, the first quarter was regarded as a low season. However, if you look at the sales number for this title in April, it is what we have usually seen in the previous years or slightly above what we have seen in the past. And all the major indicators look quite favorable. So we believe that this title will be posing a similar result to our previous years or slightly better. And as for Seven Knights 2, well, there was an initial launch effect last quarter, that's the fourth quarter of last year. And in the months of February and March, we communicated with our users to ensure more stability to it and to update the requested contest. And we refrained from updating the title for sales purposes. And we are seeing the daily average user number being quite stably be maintained. And with this, we will be updating the content of and also the elements that historically related to the sales of this title. And with that, we do foresee a favorable environment with this title as well.

[Foreign Language] The next question will be presented by Jingu Kim from KTB Investments & Securities.

[Interpreted] Yes. I have 2 questions. First is on Ni no Kuni: Cross Worlds. Well, it's almost a month that you have begun your preregistration for Ni no Kuni. Could you please tell us, if possible, some of the major indicators [indiscernible] this title? And if possible, could you give us a concrete launch date? And what is the business model behind it? And what's the company's expectation for this title? This is my first question related to Ni no Kuni. And my second question goes to page 4, BTS Dream and Merge Kuya and the other expected titles that are to be introduced in the second half of the year. So do you have plans to introduce any other new titles than the mentioned BTS Dream and Merge Kuya?

[Interpreted] So this is CEO Kwon addressing the first part of your question related to Ni no Kuni. Well, our company in the past did not disclose any numbers regards to preregistration. But we are seeing positive signals as we have expected. This is the first time that we ever disclose the launch date for Ni no Kuni. It will be June 10. That is June 10. And everything is going according to schedule without any glitches. And as for the major BM, we have disclosed the details at the media showcase. I believe that you could refer to our past [indiscernible] announcement. And as for the expectations for this title, well, within the company and even from the external parties, we see a lot of interest. So we have plans for the big 3 titles, and we have through this earnings release call introduced you to our 2 new titles: BTS Dream, with this as a tentative title; and Merge Kuya. And other than these titles, of course, the company is working on our development for new games in the North American studios, and also in the Korean studios. But as to launch date, we have yet to decide whether to introduce this game this year or not. And if an opportunity presents itself or if things are made more concrete, we will be making sure to deliver this information to you.

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

[Interpreted] Yes. I have 2 questions. First is on your margin decrease in the first quarter. Do you expect the decrease to continue into the second quarter as well? And now my second question is on your labor. Well, I believe the industry as a whole have been influenced by the increase in labor. What is your outlook for the second quarter and also the second half of this year?

[Interpreted] So this is CFO Do addressing the first question on OP margin. Well, as was mentioned during the presentation, we have seen a decrease in the first quarter. It's because there was limited introduction of new titles and also of the influence from labor cost increase pushed down our OP margin. However, we will be introducing Ni no Kuni: Cross Worlds in June. And with that, we would be finding a good momentum. And the results from Ni no Kuni would be, in part, reflected in the second quarter numbers. However, with marketing spend associated with our new launch, the upward push would somewhat be limited. However, starting in the second half of this year, we do expect to see significant improvement. Yes, now on the labor cost. Yes, it's true that the proportion of labor costs had increased in the first quarter. But as was mentioned, with results improvement expected in the second half, the proportion of labor to our business results will go back to previous levels.

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

[Interpreted] Yes. I have 2 questions. First on your headcount. As of end of first quarter, what is your plan for additional recruitment? My second question is for your new titles, the tentatively title BTS Dream and Merge Kuya. What's the impression with these games? Who is currently developing these titles? And who will be the publisher?

[Interpreted] This is CEO Kwon addressing the first part of your question. As of end of first quarter, our consolidated headcount stands at 6,360 people. And well, for net Marvel itself, I don't foresee any major increase in our headcount. But should we decide to acquire developed company, that will be another story. Plus if -- should we decide to go for a launch of another title, that would also require additional headcount. So this is rather fluid situation. But the new recruitment will be more or less in the same line as what you have seen in the previous years. And if I may give you more color on our new titles. First, on BTS Dream, it's currently being developed by Netmarble [indiscernible]. And it's a combination of rhythm action plus housing. It's a hybrid title. And it uses TinyTan as the characters of BTS, and it also uses that BTS universe. So it's a rhythm game. On top of that, you also can decorate the setting and create your own dream house. And more color on Merge Kuya. That Merge Kuya title is being developed by Netmarble N2. And the merge genre is currently getting the attention from our global audience. So various objects are merged in this game to create new objects. And you can create a new object, you can decorate your own island. And this is an expansion of the Kuya IP universe, and we've introduced very interesting characters. So the Kuya plus Kuya IP.

[Foreign Language] The next question will be presented by Junhyun Kim from HSBC.

[Interpreted] Yes. I have some questions. There is much expectation for your new title Ni no Kuni: Cross Worlds. Have you secured any of the very famous IPs? This is my first question. And my second question is related to your ESG activity. The game industry also is now paying much more attention to ESG activities. So what is the company's position on ESG?

[Interpreted] So this is CEO Kwon addressing your question. Well, we are working on various in-house IPs and also externally sourced IPs, but it's quite difficult for us to disclose the details here today. Should we have more color on things, should we make the game mobility more concrete, then, of course, we will be disclosing the information to you. Yes, ever since our establishment, Netmarble has continuously prepared ourselves in essential contribution activities. We have created Netmarble cultural foundation to fulfill our social responsibilities and also to give the thoughts to our community. And the new building that we are in, it gathers rainwater and uses it for landscaping purposes, and we also use rainwater for cleaning purposes. We also use solar panels and fuel cells and thermal heat as energy sources. So this is a renewable energy facility installed building. And through our energy management system, we decrease the carbon emission. And this is ecofriendly building that reduced greenhouse gas emission. Likewise, we are readying ourselves to systematically implementing ESG management activities. And in the second half, well, we would be creating ESG Committee under the BOD.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] We see no other questions from the audience. So with that, we'll be concluding the Q1 2021 earnings release session of Netmarble. Should you have any follow-up questions, please don't hesitate to contact our IR team. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]