Netmarble Corporation (A251270) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the fiscal year 2021 second quarter earnings results by Netmarble. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2021 second quarter earnings results by Netmarble.

[Interpreted] Good afternoon, this is Nicky Kim from Netmarble's IR team. I sincerely thank investors and analysts for attending the Q2 earnings session despite your busy schedules. Today with us are: CEOs, Young-Sig Kwon and Seungwon Lee; CBO, Young-Hoon Paek; and CFO, Gi-Wook Do. Today, we will take 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. Now CFO, Gi-Wook Do, will give his presentation.

[Interpreted] Good afternoon. I will give you the second quarter results. Please refer to Page 3. The revenue in Q2 partly reflected the launch effect of Ni no Kuni: Cross Worlds that was released in June and decreased 15.8% Y-o-Y and increased 1.2% Q-o-Q at KRW 577.2 billion. With marketing cost and labor cost increases, EBITDA decreased 61.8% Y-o-Y and 47.9% Q-o-Q at KRW 41.8 billion. EBITDA margin was at 7.2%. Next page is on operating and net profit. OP in the second quarter decreased 80.2% Y-o-Y and 70.1% Q-o-Q at KRW 16.2 billion. Net profit recorded KRW 48.2 billion and controlling shareholders' profit, KRW 45.7 billion. Non-operating number changed due to a related company highest capital increase and the consequent one-off equity method gain. Next page is on overseas revenue contribution. Overseas revenue was at KRW 424.6 billion in the second quarter. Overseas revenue contribution is at 74%, which is a 3 percentage point increase over the previous quarter. The regional breakdown is as follows: North America, 36%; Korea, 26%; Southeast Asia, 12%; Europe, 11%; Japan, 10%; and others at 5%. Ni no Kuni was released in Taiwan, Hong Kong and Macau in the second quarter, pushing up Southeast Asia's revenue contribution by 3 percentage points. Next page is on different genres' contribution to sales. In the second quarter, RPG accounts for 32%; MMORPG, 32%; casual, 25%; and others, 11%. The portfolio remains diversified. With the launch of Ni no Kuni in June, MMORPG's share grew 2 percentage points over the previous quarter. Next page is on game portfolio. As of end of Q2, Marvel Contest of Champions accounted for 13% of revenue; Seven Deadly Sins, 13%; Ni no Kuni, 12%; Lineage 2: Revolution, 6%; Seven Knights 2, 5%; Blade & Soul Revolution, 5%; and Harry Potter at 5%. The portfolio remains diversified. Next page is on our cost structure. Operating costs in Q2 decreased by 7.1% Y-o-Y and increased 8.7% Q-o-Q at KRW 561.0 billion. Fees paid, at KRW 243.4 billion, saw a 15.4% decrease Y-o-Y and 3.9% increase Q-o-Q. With more revenue contribution from Ni no Kuni, fees proportion increased compared to the previous quarter. Labor cost was at KRW 154.6 billion. The salary increase of staff and management is reflected in full for the quarter. And with that, the number increased 17.8% Y-o-Y and 7.8% Q-o-Q. Marketing cost recorded KRW 100.4 billion. With earlier execution of marketing for Ni no Kuni launch, marketing cost decreased 19.6% Y-o-Y and increased 29.4% Q-o-Q. Other cost was at KRW 62.6 billion. This amount includes KRW 25.6 billion of depreciation and other fees of KRW 37.0 billion. Now on our new titles lineup. Preregistration for MARVEL Future Revolution began on June 29. It will be launched on a global basis on August 25, excluding China and Vietnam. The company is ready for a global launch ex Korea, China and Vietnam of Seven Knights 2 in the second half. Seven Knights Revolution will be simultaneously launched in Korea and Japan in the second half as well. BTS Dream: TinyTAN House and Merge Kuya Island is scheduled for a global launch ex China in the second half, too. Lastly, in the first quarter next year, Ni no Kuni will be introduced to the remaining global audience, excluding China. This completes the company's presentation. If you have any questions, we will be glad to entertain them now.

[Interpreted] [Operator Instructions] The first question will be presented by Dong-hee Kim from Meritz Securities.

[Interpreted] Yes, I will give you the translation of the two questions first. I would like to know the revenue trend of your new title, Ni no Kuni. Could you please give us the breakdown for each different geography for different countries? And do you think you will be able to meet the announced schedule of rest of the world launch? And my second question is related to your operating profit. It has seen a decrease. Could you please give us the details to why the number has seen a big decrease? And could you please give us some forward-looking statement on your marketing and labor costs in the second half of this year?

[Interpreted] Yes, this is CEO, Kwon, addressing your question. As to your first question on Ni no Kuni launch and the revenue trend, well, we've enjoyed the initial launch. And after that, the title is stabilizing. And if I may give you a countrywide breakdown, well, Korea has contributed 50% to the revenue from this title. And Taiwan and Japan share are pretty much the same at roughly about 25%. And as for our launch on a global basis next year, well, we are scheduling early first quarter -- first quarter next year. And I don't foresee any glitches down the road.

[Interpreted] Yes, this is CFO, Do, addressing your second question related to operating profit. While the operating profit number has mostly been influenced by marketing costs and also increase in our labor cost, as was mentioned during the presentation, that the earlier execution of marketing costs related to the launch of our new title, Ni no Kuni, and labor cost, well, the rise in labor cost was reflected full for the second quarter. So these titles influenced our OP numbers. And as to our second half expectation for these items, well, as for marketing, compared to the second quarter, it will see a slight decrease. However, the development studios would have to continue recruiting talent. So the labor cost will remain more or less the same. However, having said that, we do believe that the OP numbers will see much improvement in the third quarter over the second quarter because Ni no Kuni, the title's influence, would be reflected in full in the third quarter.

[Interpreted] The next question will be presented by Jinsung Choi from Cape Investments & Securities.

[Interpreted] Yes, I have a question related to your recent acquisition of SpinX. Well, you've invested KRW 2.5 trillion to this company. Is it because you failed to acquire Playtika in the past that you became more interested in this field and decided to go for this major acquisition? And why did you take up interest in the social casino genre? Do you expect to see much synergy by this acquisition? And some believe that the social casino market is rather stalled. So what is your take on this view? And what do you expect from this company? What will be the results from this company in the future years? And when will the numbers be consolidated into your numbers?

[Interpreted] Yes, this is the CEO, Lee Seungwon, addressing your question. Netmarble has always been interested in the global casual genre and the market. That is why we decided to acquire Jam City back in 2015. And we are quite interested in the growth potential of the social casino genre. And we decided to go ahead with the acquisition of SpinX Games. And it was in the same light or in the same vein that we've looked into the possibility of acquiring Playtika because we saw the vision when it comes to this social genre, which we participated back then in the bid war. But due to the lack of capital back then, we were not able to acquire the company. And SpinX is the fastest-growing company in that specific sector. We took up interest in this company, and we've decided to go ahead with the deal. And as for the synergy setup, we hope to gain or we have enjoyed as well the social casino sector, along with the popular match 3 sector, is one of the most representative of the casual game genres in the global market. And by acquiring this company, I think we could add to the lineup of our casual genre in a meaningful way. And with that, we will be able to gain competitiveness in the casual genre as well. And it's a platform, the nature of this gaming company is more or less a tack-on company. And because of this given nature, I believe that the acquisition will greatly add to our portfolio. And as to the second part of your question, we believe the social casino genre is a continuously growing one. And if I may give you more color on the revenue of SpinX, in 2021, we believe the number will stand somewhere around KRW 700 billion to KRW 750 billion. And as for the timing of our number to be consolidated, by the fourth quarter, I believe that the numbers will be reflected full in our book.

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

[Interpreted] Yes. I've got two questions. First is on your lineup. In your presentation, you told us that for the new lineup, centering around the domestic developers, but half of the new lineups of your overseas development companies, including Kabam and Jam City. This would be my first question. And my second question goes -- is for your Netmarble HYBE. I believe that this business is in cooperation with Coway. So could you give us more color on this business as well?