Netmarble Corporation (A251270) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Nicky Kim from Netmarble IR team. I deeply thank the investors and analysts for taking time out of their busy schedules and attending our Q3 Earnings Session. Here with us are CEOs, Young-Sig Kwon, and Seungwon Lee; and CFO, Gi-Wook Do. They will address 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 Do will brief you the results.

[Interpreted] Good afternoon. This is Gi-Wook Do in charge of finance and strategy. I will give you the overall results for Q3. Please refer to Page 3. Q3 revenue decreased 5.5% Y-o-Y. But with full reflection of Ni no Kuni, that was introduced in June, and with the launch effect of MARVEL Future Revolution, that was released on August 25, recorded a 5.2% increase Q-o-Q at KRW 607.0 billion. EBITDA decreased 48.9% Y-o-Y and increased 40.0% Q-o-Q at KRW 58.5 billion. EBITDA margin was at 9.6%. Next page is on operating profit and net profit. Q3 OP decreased 69.6% Y-o-Y and increased 64.2% Q-o-Q at KRW 26.6 billion. Net income was at KRW 35.7 billion and controlling shareholder net profit at KRW 30.2 billion. Nonoperating profit decreased KRW 17.0 billion Q-o-Q, mainly due to the one-off effect from HYBE's capital increase related equity method gain, not recurring in Q3. Next page is on geographic breakdown. Q3 overseas revenue was at KRW 426.0 billion, which is similar to last quarter numbers. But with rise in domestic revenue, overseas revenue contribution decreased 4 percentage points at 70%. The regional breakdown is as follows: North America 34%; Korea, 30%; Japan, 12%; Southeast Asia 11%; Europe 9%; and Others 4%. With full reflection of Ni no Kuni in the third quarter, revenue in Korea and Japan rose 4 percentage points and 2 percentage points, respectively compared to the previous quarter. Next page, it's breakdown by genre. Our portfolio remains diverse in Q3 with 40% MMORPG, 27% RPG, 22% Casual and 11% Others. With the full reflection of Ni no Kuni revenue and launch of MARVEL Future Revolution, MMORPG's share rose 8 percentage points Q-o-Q. Next page is on games portfolio. As of end of Q3, Ni no Kuni contributes 20% to revenue, Marvel Contest of Champions, 13%; Seven Deadly Sins: Grand Cross, 7%; Lineage 2: Revolution 5%. The portfolio [Technical Difficulty] Next page is on major cost structure. Operating expense in Q3 was at KRW 580.4 billion, which is a 4.6% increase Y-o-Y and 3.5% increase Q-o-Q. Commissions and fees paid was at KRW 254.6 billion, which is 3.5% decrease Y-o-Y and 4.6% increase Q-o-Q. Labor cost at KRW 157.9 billion increased 14.6% Y-o-Y and 2.1% Q-o-Q. This is because of developer addition with acquisition of Ludia. Marketing cost was at KRW 100.4 billion. With advanced marketing execution and MARVEL Future Revolution launch, it increased 17.2% Y-o-Y and remained similar to last quarter. Lastly, other expense was at KRW 67.5 billion, including KRW 31.9 billion of depreciation and KRW 35.6 billion of other fees. Now on our new titles lineup. Today, the company has introduced Seven Knights 2 in the global market, excluding Korea, China and Vietnam. In the first half of 2022, Seven Knights Revolution will be introduced to the Korean gamers and Ni no Kuni will be launched in the global market ex China. Merge Kuya Island will also be introduced globally ex China in the same period. Lastly, the company is preparing a soft launch of BTS Dream TinyTAN House in the global market ex China. This concludes the company's presentation. Should you have any questions, please post them, we will be addressing them.

[Interpreted] [Operator Instructions] The following question will be presented by Sang-Hyun Lee from IBK Securities Corporation.

[Interpreted] I would give you the translation of the 2 questions. So first is on your Seven Knights 2 global launch, what is the company's expectation for the new launch? This was the first question. And now on to the second question, which is related to MARVEL Future Revolution. The title was not really too expectation. What was the reason behind it? And do you have any plans to revamp this title?

[Interpreted] Yes, this is CEO Kwon addressing the first part of your question related to Seven Knights 2. Well, as of today, 11:00, there was a global launch of this title. And as you're well aware, when we service the Korean market, the domestic market, in the early stages, there were some service stability related glitches. But whilst we readied ourselves for the global launch, we made improvements to any issues that we have found. So we believe that the results from our global audience would be far better than what we have expected so far from the domestic audience. And now to the second part of your question, which was related to MARVEL Future Revolution. Well, when I talk about quality itself, it was well received by the game users, but there were some issues with the system. And the fandom of Marvel content, well, there was a slight mismatch for the fandoms and the game itself. But we continue to update, we are going to improve on such issues.

[Interpreted] The second question will be provided by Kim Jingu from KTB Investment & Securities.

[Interpreted] I will give you the translations of the questions. Well, first is on your Seven Knights 2 global launch, I believe that the results from this title will be reflected in the fourth quarter. And the reflected days will be somewhere around 50 days of business reflected in your fourth quarter number. And I know that now you're consolidating the numbers from your SpinX acquisition. So how much of a contribution will these 2 new businesses give to your revenue and your operating profit. And now more on SpinX consolidation, what is the scale? And what is the period over which you'll be allocating your purchase price of SpinX? This is my other SpinX-related question. And now on to the second part of my question. Well, in the second quarter, in your earnings release session, that you have mentioned that you would be decreasing your marketing costs in the third quarter compared to Q2. But for 2 consecutive quarters, your marketing cost has gone beyond KRW 100 billion mark. And I believe it's largely due to MARVEL Future Revolution. So could you give us the exact number in terms of marketing that you spent for MARVEL Future Revolution? And what is your outlook for marketing cost execution in the fourth quarter? And with your acquisition of Ludia and SpinX, I believe that you have added on to your headcount. And with that, how much of a rise in labor costs do you foresee for the fourth quarter?

Yes, this is CFO Do, addressing your question. First, if I may give you some heads up on our outlook for the fourth quarter. With Seven Knights 2 and SpinX, we do believe that we will be seeing improvement in topline numbers as well as our EBITDA numbers. And even reflecting the purchase price allocation, we believe the operating profit numbers will see an improvement as will the rate. And now onto the second part of your question. And now on your marketing cost-related question. Well, it's true that our marketing costs did not see a decrease in the third quarter. It's because we have spent more than our expectation on MARVEL Future Revolutions' marketing activities. However, we've spent the marketing, but we did not reflect the results from this new type. So that is something that you have to take into account. And now for our marketing cost-related outlook for the fourth quarter. Well, as we have mentioned in our previous answer, with SpinX, we would see marketing and labor costs on an absolute basis go up in terms of numbers. But having said that, the proportion of marketing cost and labor costs will remain more or less the same. And those 2 new business lines would be, of course, adding to our profit numbers.

[Interpreted] The following question will be presented by Oh Dong Hwan from Samsung Securities.

[Interpreted] Yes, I have 2 questions. First is related to your SpinX. Well, could you please give us a guidance on the revenue number and also the OP number? This is to calculate what we would be expecting on company-wide level, on your revenue and operating numbers? And secondly, how ready are you for Metaverse and its related businesses because that's the buzzword nowadays.

[Interpreted] So rather than giving you the concrete numbers for SpinX in the third quarter, I would like to give you a range of what we expect in Q4. Well, compared to other games, well, quarterly EBITDA numbers for SpinX business is likely to be better. So on an operating profit level, even reflecting the purchase price allocation, we will be witnessing a better operating margin for SpinX compared to conventional game titles. And this, of course, overall, would move up our operating margin as a whole.

[Interpreted] Yes, this is CEO Kwon, addressing your Metaverse question. Well, the company is actively engaged in Metaverse-related businesses. We have set up Metaverse Entertainment, and we are currently in the process of conducting our Metaverse Idol project. This will create new IPs. And after that, we could link this new IP to our games, and we will be creating videos using VFX studios. And now on the blockchain and NFT-related activities, we are currently working on the development of how to link these new technologies to our games. And perhaps at the earlier part of next year, we would be giving you a presentation on the lineup of such businesses.

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

[Interpreted] Yes, I have one question related to your lineup scheduled for next year. In your presentation, you've mentioned a global launch of Ni no Kuni in the first half of next year. And compared to markets where you have already released Ni no Kuni, what kind of expectations do you have for this global launch? And if you can disclose any other plans for new introduction next year, I would really appreciate it.

[Interpreted] Yes. The company's target, in the first quarter, for this global introduction of Ni no Kuni. And we have released this title in markets, including Korea, Japan and Taiwan. And we are adding more sophistications with our findings from these markets. And for the graphics of Ni no Kuni, well, it could be taken very -- well, it would be liked by various user groups because of the nature of its graphics. So we have big expectations for the global introduction. And we are currently working on various titles. But due to COVID, we were not able to have massive events to disclose our plans to the audience. But next year, we do have an event that is scheduled. And at this event, we will be giving you flavors or colors to the various themes and titles that we are working on as well as our strategy going forward.

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

[Interpreted] So this is a simple question asking you to confirm whether your sales of TriCo Bancshares in HYBE, has it been reflected in your nonoperating numbers?

[Interpreted] Yes. To be more precise, it was our disposal of TriCo Bancshares and game shares. And now the financial influence from these 2 transactions, we've gained KRW 700 billion in disposal. But you would not probably find the numbers in our P&L statement because according to our accounting principles, we reflect it as our capital. So you would see increase in our asset numbers, but it won't be reflected in our P&L numbers.

[Interpreted] With that, we will conclude Q3 Earnings Release Session of Netmarble. Should you have any further questions, please contact our IR team. I thank you, once again, for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]