Netmarble Corporation (A251270) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. I am Sun Huen Lee from Netmarble IR team. First, let me extend my sincere appreciation to investors and analysts for joining Netmarble 2022 Q1 Earnings Conference Call despite your busy schedule. With us are CEO, Young-Sig Kwon, CEO; Gi-Wook Do; and President of Global Headquarter, Seungwon Lee. After the formal presentation, we will have a Q&A session. I would like to remind you that contents presented during today's call have been prepared before the completion of the external audit. Therefore, based on the outcome of the audit, please understand that there may be some changes. And now Netmarble's CEO, Gi-Wook Do, will present the company's earnings.

[Interpreted] Good afternoon. This is Gi-Wook Do. First, summary of our Q1 earnings. Please turn to Page 3. Q1 revenue was KRW 631.5 billion, an increase of 10.7% Y-o-Y and a decrease of 16.1% Q-o-Q due to the absence of a new blockbuster title, downward stabilization of previously released games revenue, along with seasonality in overseas business. Also, EBITDA was KRW 45.7 billion, a decrease of 43.1% Y-o-Y and a decrease of 62.2% Q-o-Q due to the decrease in revenue. EBITDA margin was 7.2%. Next page is operating profit and net profit. In the first quarter, operating loss was KRW 11.9 billion. Net loss was KRW 51.8 billion, and controlling shares net loss was KRW 43 billion. Nonoperating profit fell quarter-over-quarter to KRW 130.4 billion. The main reason for the decline was that in this quarter, we didn't experience the one-off temporary equity asset-based gain from the high capital increase that we experienced in the previous quarter. Next page is revenue breakdown by region. Q1 overseas revenue was KRW 529.4 billion. The share of overseas revenue increased by 6 percentage points to 84%, with the reduction in the share of domestic revenue from the downward stabilization of revenue for games already released in the domestic market. By region, revenue shares were in the order of: North America, 49%; Korea 16%; Europe 4%; Southeast Asia, 10%; Japan 8%; and other, 5%. Next page is revenue breakdown by genre. In the first quarter, Casual games, 48%; RPG, 21%; MMORPG, 19%; and other, 12%. We are continuing to further diversify our portfolio. MMORPG's revenue share fell by 7 percentage points quarter-over-quarter, with a downward revenue stabilization of previously released MMORPG games, including Ni no Kuni: Cross Worlds. Next page is game portfolio. As of the end of the first quarter, revenue share by key title, Marvel Contest of Champions, 9%; Cash Frenzy, 9%; Jackpot World, 7%; Lotsa Slot, 7%, the Seven Deadly Sins: Grand Cross, 7%; and Ni no Kuni: Cross Worlds, 7%. As such, we continue to maintain a well-diversified portfolio. Next page is major cost structures. In Q1, operating costs were KRW 643.4 billion, a decrease of 7.9% Q-o-Q and an increase of 24.6% Y-o-Y. Commissions were KRW 245.5 billion. And with the fall in revenue, commissions declined by 13.2% Q-o-Q, however, increased by 4.8% Y-o-Y. Labor cost was KRW 186.8 billion, an increase of 2.1% Q-o-Q and 30.3% Y-o-Y due to the headcount increase related to the development of new titles. Marketing cost was KRW 112.9 billion, a decline of 7.2% Q-o-Q and an increase of 45.5% Y-o-Y due to the absence of a new blockbuster title in Q1. Let me talk about the lineup for new titles. In Q2, we plan to launch Ni no Kuni: Cross Worlds Global, Golden Bros, BTS Dream: TinyTAN House, Disney Mirrorverse Guardians; and Merge Kuya Island. And in the second half, we plan to roll out Seven Knights Revolution, Overprime, Monster Arena, King of Fighters Arena, Champions: Ascension, Everybody's Marble: Meta World, Grand Cross W and Hypesquad. And out of these titles, we plan to apply blockchain for Monster Arena, King of Fighters Arena, Champions: Ascension and Everybody's Marble: Meta World. We spent the first quarter pacing ourselves to strengthen the payability and focus on polishing and refining the titles scheduled to be released this year. From the second quarter, we are planning to release multiple new titles played on a variety of devices and platforms, including games using blockchain, such as Ni no Kuni: Cross Worlds Global and Golden Bros. Please stay tuned and give us your support as we are preparing a more diversed and richer new title lineup and by actively progressing with new businesses such as metaverse and blockchain. This is the end of the earnings presentation. We'll now move on to the Q&A session. Thank you.

[Interpreted] [Operator Instructions] The first question will be presented by Junhyun Kim from HSBC.

[Interpreted] I have 2 questions. The first question is that in respect to your activities in the first quarter, I know that you have been taking yourself and during actually prepare and release titles going forward. And that's the main reason why in terms of Q1 earnings, we saw a decline in your revenue and overall profit? Now I would like to take this opportunity to hear the company's outlook. As you look out to the second quarter, could you actually elaborate and give us more color as to what you expect from the company going forward? The second question is related to the comment about how you are continuously applying blockchain technology in the new titles that you will be launching overall. And I just would like to get a better understanding of how this application will mean to the new titles that we hold out? What is the significance of this?

[Interpreted] Thank you. Let me first address your first question related to the earnings outlook. As you correctly mentioned, in Q1, in respect to the existing games revenue performance, we experienced a downward trend. And we, at the same time, did not launch a new blockbuster title. And at the same time, we were also affected by the seasonality in the overseas business. And so that is the reason why we saw a decline in both the revenue and also the operating profit. But as we look to the second quarter, we have a full lineup ready to be our launch going forward. Specifically, we have Ni no Kuni: Cross Worlds Global as well as many other titles that we have been preparing for. We believe that the releases will help us to drive revenue growth. And at the same time, we will note, we will have to recognize that as we release new titles, we will be incurring additional marketing cost and our higher labor costs going forward. But overall, we believe that we'll see an upside on the revenue side, starting from the Q2. But overall, a full-fledged recovery in our profitability that we will begin to happen from the second half of this year.

[Interpreted] And in respect to your second question, I will address that question. I am Young-Sig Kwon. In respect to Netmarble, we are using the blockchain and applying that to our games. And the way we have designed this was to make sure that blockchain system, we'll continue to attract users, and it will also lead to the increase in our revenue as well. And for the past 2 months in terms of our operation, we actually witnessed this happening, and we saw a rise in our in-app revenue. Specifically, as we actually applied this in A3: Still Alive Global, we saw increases in both the GAU and our in-app revenue. And that is why we believe that it has a direct correlation.

[Interpreted] The next question will be provided by Ui Hoon Jeong from Eugene Investment Securities.

[Interpreted] I'm Jeong Ui Hoon. I will broadly ask 3 questions. The first question is related to the announcement made yesterday where you will be actually launching the Ni no Kuni: Cross Worlds Global on May 25. And -- but of course, this is a global market, and we're not familiar with the region, and that is why if the company can share the status of the preregistration and also share with us the expectations you have for this new title. And I would also appreciate the company talking about its plans to how it plans to build up the blockchain ecosystem going forward? The second question is related to the company's overall profit structure, and you also previously mentioned that you saw a rise in the in-app revenue as well. I'm just wondering, going forward, with the company also entertain the possibility of taking commissions as you apply the token to your game as well. And additional question that I would like to ask is related to the comment made earlier. One of the reasons for the fall in the revenue was the seasonality of the overseas business. But specifically, was it related to just the SpinX Games? Or was it more general or the performance of the overseas games?

[Interpreted] This is Young-Sig Kwon, and I will address your questions, and I think you were talking about 3 main aspects. So I will first talk about the performance, the preregistration and the expectation that we have for the Ni no Kuni: Cross Worlds Global. Also, the company's plan in respect to how we would like to build up the blockchain equipment system. And at the same time, I will also talk about the commission model. And lastly, to talk about the performance of the overseas business. Moving to the first area, the Ni no Kuni: Cross Worlds Global, we are scheduling to release this on May 25. And in terms of the preregistration performance, it is progressing as the company has anticipated. In particular, we see some meaningful user registration numbers coming from U.S. and Europe. And we are applying the overall blockchain system to this type. And we believe that it's going to be satisfying both the existing viewers, users as well as P2E users as well. The expectation that the company had is related to build a title so that we will have a long run hit of this MMORPG game as well.

[Interpreted] And moving to Netmarble blockchain system ecosystem, just to briefly explain the business model that we are thinking about for the company, our focus is really to generate in-app revenue, and that's going to be the main income driver. And on the other hand, we will also allow P2E users to earn money through the point. And so it is not structured or designed so that the company actually seek to generate additional income through the token commission. So it's purely focusing on generating in-app revenue.

[Interpreted] And for the third question, -- this is Seungwon Lee. And in respect to the seasonality issue for the first quarter, we were referring to the overall our performance of the overseas market because it was a low season in terms of the game performance. But this is something that we have been experiencing for multiple years over time. So usually, the seasonality peak in the fourth quarter, and they sharply declined in the first quarter. And this year, of course, was no exception. But another factor that did amplify the performance was the reopening as related to the COVID-19 pandemic and the impact actually somehow amplified the impact of the seasonality as well.

[Interpreted] On this note, we will conclude Netmarble's 2022 Q1 earnings conference call. For any additional questions, please reach out to the IR team. 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.]