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 will begin the conference call of the fiscal year 2021 fourth quarter earnings results by Netmarble. This conference call will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2021 fourth quarter earnings results by Netmarble.

[Interpreted] Good afternoon. This is [ Sun Huen Lee ] from Netmarble's IR team. First of all, I thank the investors and analysts for taking part in our 2021 Q4 earnings session despite your busy schedule. Here with us are CEO, Young-Sig Kwon and Gi-Wook Do; Global Headquarter President, Seungwon Lee. 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 therefore could be subject to future changes upon such review. With that, CEO, Gi-Wook Do, will give us the results presentation.

[Interpreted] Good afternoon. I will first deliver the yearly 2021 management results. Please refer to Page 3. The yearly revenue for 2021 grew 0.8% Y-o-Y at KRW 2.5059 trillion. 2021 overseas revenue accounted for 73% and domestic 27%. With rise in salaries of management and staff and increase in number of developers, the company's labor cost increased. With that, EBITDA decreased 20.3% Y-o-Y at KRW 305.8 billion. Next page is on Q4 results. Seven Knights 2 was released to the global audience in November last year, and the result of SpinX Games was reflected in full starting Q4. And as a result, revenue grew 20.4% Y-o-Y and 23.8% Q-o-Q at KRW 751.3 billion. With the SpinX acquisition, EBITDA grew 12.3% Y-o-Y and 114.0% Q-o-Q at KRW 125.2 billion, with EBITDA margin rate of 16.7%. Next page is on operating and net profit. Q4 operating profit recorded KRW 57.5 billion with net profit of KRW 107.1 billion and controlling shareholder profit of KRW 111.5 billion. Nonoperating profit increased due to capital increase of HYBE and the resulting temporary increase of equity method gains. Next page is on revenues from different markets. Q4 overseas revenue was at KRW 587.1 billion. With full recognition of SpinX Games from Q4, overseas revenue contribution increased 8 percentage points over previous quarter at 78%. The regional breakdown is as follows: North America, 43%; Korea, 22%; Europe, 11%; Southeast Asia, 10%; Japan, 9%; and others at 5%. With full reflection of SpinX Games in Q4, North American revenue contribution jumped by 9 percentage points over the previous quarter. Next page is on the company's revenue genre mix. As of Q4, Casual games accounted for 40%; MMORPG, 26%; RPG, 21%; and others, 13%. The portfolio remains diversified. With the addition of SpinX titles, including Cash Frenzy, Jackpot World and Lotsa Slot, Casual genre's contribution to revenue increased 18 percentage points over the previous quarter. Next page is on our game portfolio. As of end of Q4, Marvel Contest this Champions accounted for 12%; Ni no Kuni: Cross Worlds, 9%; Cash Frenzy, 8%; Jackpot World, 6%; Lotsa Slot, 6%; Seven Deadly Sins: Grand Cross, 5%; Seven Knights 2, 5%. The company's portfolio has seen continued further diversification. For your information, with the reflection of SpinX Games starting Q4, new titles, including Cash Frenzy, Jackpot World and Lotsa Slot have been included. This following page is on major cost structure. Operating expense in Q4 increased 28.1% Y-o-Y and 19.5% Q-o-Q at KRW 693.8 billion. Fees paid at KRW 281.1 billion increased 14.1% Y-o-Y and 10.4% Q-o-Q. Percentage-wise, fees paid decreased over the previous quarter, with the increase of in-house IP with the acquisition of SpinX Games and global launch of Seven Knights 2. Other costs stood at KRW 112.3 billion. It is an increase of 59.5% Y-o-Y and 66.4% Q-o-Q, with SpinX Games and Ludia acquisition-related purchase price allocation and other operational costs. Now on our lineup. In the first half of 2022, the company plans to launch Seven Knights Revolution, Ni no Kuni: Cross Worlds global, Golden Bros, Netmarble Pro Baseball 2022, Merge KUYA Island, BTS Dream: TinyTAN House. In the second half, we have plans to release Overprime, Squad Battle, Everybody's Marble: Meta World, Champions: Ascension, Monster Arena and Grand Cross W. In 2022, Netmarble plans to introduce 6 blockchain games, including A3: Still Alive. We're already in around 10 well-made games, including PC games and titles that apply blockchain and metaverse technology. The company has great expectations for them. And I look forward to your continued interest and support. This concludes our results presentation. We will now entertain your question. Thank you.

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

[Interpreted] [Yes. I will give you the translations of the 2 questions first.] The first question is related to operational expenses. First, I see that there is some increase in your labor cost and also your marketing cost. And could you please separate the rising labor cost and marketing cost influence on your operating expense with the influence of SpinX acquisition to your operational costs? And I see that you have recently added manpower. So could you please provide us with a guideline when it comes to your labor cost for this year and also on your marketing costs? The second question is related to your SpinX acquisition and how much PPA has been reflected with that acquisition, and over how long a period will that PPA be done over. And what are the one-off costs associated with the acquisition in the fourth quarter?

[Interpreted] Yes. This is CEO Do addressing your question. Well, I don't think it's really meaningful to separate the number influence on our fourth quarter numbers or the overall influence that the activities will have on our overall year '22 numbers. So I think your question is geared towards asking the directionality of the influence related to SpinX acquisition. So cost wise, when it comes to our labor costs, with the acquisition of SpinX, proportionally, the labor cost is likely to see a decrease percentage-wise. And as for marketing SpinX, there has been traditionally spending more compared to us when it comes to marketing activities. The proportion of our marketing, we'll see percentage-wise increase. Last comments on commissions and fees paid because is this also an influential number. So prior to the acquiring SpinX, we have been spending more on fees paid percentage-wise. But with the acquisition of SpinX, the percentage-wise commissions paid will likely to see a decrease. So once again, the labor cost percentage-wise, we'll see a decrease. The commissions and fees paid, we'll likely to see a decrease. However, when it comes to marketing, there will be a percentage-wise increase. But the decreases will more than offset the increase in marketing costs, leading to a better profitability of the company as a whole. Now on the purchase price allocation with the recent acquisition, well, we have not been so far disclosing details when it comes to PPA with our M&A activities. But since SpinX acquisition has much influenced on our financials, we will be giving you more detail this time. So quarterly, it will be a reflection of somewhere around KRW 25 billion. And the depreciation or amortization period differs according to different titles, but on average, it will be between 16 to 19 years. And now on the one-off costs in Q4 related to our SpinX. Well, if you look at our other costs, well, the reflecting number there has not much to do with our SpinX acquisition one-off cost, but it's much more related to the acquisition of Ludia by Jam City. And the amount itself is negligible.

[Interpreted] The following question will be presented by Jeong Ui Hoon from Eugene Investment.

[Interpreted] [Yes. I will give you the translation of the 2 questions.] Yes, according to the genre characteristics of titles published or developed by SpinX, I do believe the volatility associated with their titles will be less greater. So is it possible that you carve out a guidance number for SpinX games only? So if that's possible, I would like you to share those numbers. And while for your Overprime title, well, you recently conducted a closed beta test. And internally, what's your view on the title? And during the Netmarble together with press, we've heard your plans about you're going for a multi-platform strategy. And you've also revealed your ambitions for PC titles and also console titles. So could you give us a more detailed outline on your plans going forward?

[Interpreted] Yes. It's -- at this point in time, difficult to give you a carved out number for SpinX only. It's difficult to give you the breakdown number, but I will once again emphasize on the company's overall directionality. With the inclusion of SpinX into our numbers, we will see an improvement in terms of our profitability. There would be a beneficial influence to our labor cost and also commissions and fees paid. And as was mentioned during my previous answer, there will be some rise in the overall marketing costs. But the rising marketing expenses, that will be more than offset by -- or that will be offset by the decrease in our labor cost and fees and commissions paid.

[Interpreted] [Yes. The second part of your question will be addressed by CEO Kwon.] So on sim basis, we've conducted a closed beta test for our Overprime title. And the general response from that test was quite positive. And we've conducted the CBT in order to test the character balance of the title, and now we have the results in. And well, it was only our first test and it's too early in the development phase to be giving you a company-wide outlook for the title. And if you look at overall market trend when it comes to devices and platforms, well, there are different platforms and devices out there, including mobile, PC and consoles. But if you look at the content provided for all these different platforms and devices, what -- the content allows cross-play. So in the development phase, we would be not separating the contents developed for different devices and platforms, so it will be a more integrated approach on our side.

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

[Interpreted] [Yes. I will give you the translations of the 2 questions.] First, you said that the fees and commissions paid have seen a percentage-wise decrease with your acquisition of SpinX. Could you please provide the number-wise guideline? That was the first question. And now the second question is on your dividend policy. Could you please share with us your dividend policy and your shareholder policies?

[Interpreted] So this is once again CEO Do addressing your questions. First, on the fees and commissions rate, compared to our existing business, SpinX has lower fee rate. So with the acquisition, we will see an overall downward movement of fees and commission rates. But on top of that, we have made our own efforts, too. And as was mentioned during the Netmarble together with press event, in year 2022, we have a lot of new titles that will be released into the market that uses our own in-house IP. And that will push down fees and commissions paid, too. As for the dividend policy, it remains unchanged from the previous years. So we have a controlling shareholder net profit. And takeaway noncurrent profit and loss from that number will give us what we call adjusted share -- controlling shareholders' profit. And 30% of that amount will be used as our dividend payment.

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

[indiscernible] [Yes. I will give you the translations of 2 questions.] First is related to your key currency coin. So you've mentioned listing your currency coin. And well, if you look at the moves of other peer companies, well, they say it takes quite a long time to list their key currency coin. So I know that you have plans for A3: Still Alive by March, and is it possible that you list your key currency coin before that date? And well, if I may further talk about your peer, we made -- they had their plans for their coin. And with their sales of their coins, their share price has been negatively influenced, leading to much unsatisfied shareholders. So I would like to hear your plans on your activity in your coin. And once again, back to SpinX acquisition, well, many social casino companies have seen rather a low fourth quarter. But what about your business with SpinX, what was SpinX' Q4 Y-o-Y revenue growth like?

[Interpreted] Yes. This is CEO Kwon addressing the first part of your coin question. Well, we do have plans for our coins for March. But rather than going for listing at the centralized exchange, we would be going for the decentralized desk approach first. And after that, soon after that, we would bring it more to the centralized exchange. And as for our coin economy policy, well, at this point in time, it's difficult to give you a 100% fixed answer. But as of today, we have no plans to sell our self-issue coin into the market.

[Interpreted] And this is CEO Do to addressing your SpinX question. Well, there are different ways of research and doing calculations. But if you would look at '21 number over 2020 number, what the market itself has seen was about a 15% increase. But when it comes to SpinX, it's twice that growth.

[Interpreted] The following question will be presented by Sung Jong Hwa from eBest Investment and Securities.

[Interpreted] Yes. Well, once again back to SpinX. Could you, if possible, give us concrete numbers on revenue and operating costs for SpinX in Q4? And my second question is related to Everybody's Marble: Meta World. So could you give us more color or more directionality with this title?

[Interpreted] So as I mentioned in my previous answers, at this point in time, I cannot give you the carve-out numbers for Q4 SpinX. And well, if I may briefly talk about the EBITDA margin for SpinX, it has been stably moving around mid-20% to upper 20% level. So there has been much stability or consistency with the EBITDA numbers.

[Interpreted] This is CEO Kwon addressing the second part of your question related to Everybody's Marble: Meta World. Well, the contents for the metaverse to be provided by the company. And the users themselves in this virtual space will enjoy themselves and engage in specific actions. And according to how the users enjoy themselves and what kind of actions they engage in, in that metaverse, the company will tailor our service to those actions. So Everybody's Marble: Meta World, it will be based mainly on real estate investment. And after the real estate investment, the users in that space could build their own buildings and they do other activities. And they could also enjoy Everybody's Marble, the game title, within that metaverse. So this will be our first approach. And what to be more added to the virtual space? Well, we are thinking of approaching it in a very multifaceted way.

[indiscernible] This concludes the fourth quarter and the yearly management results presentation by Netmarble. Should you have any follow-up questions, please don't hesitate to contact the company's IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]