Netmarble Corporation (A251270) Earnings Call Transcript & Summary

Good afternoon. This is [ Tamini ] from Netmarble's IR team. I thank the investors and analysts for taking time out of their busy schedules to attend the Q2 2022 earnings release session of Netmarble. Today, here with us are CEO, Young-Sig Kwon and Gi-Wook Do; and Seungwon Lee, President of Global Headquarters. They will be addressing questions after the results presentation. Please note that the content presented today have yet to undergo an independent auditor's review and could be subject to changes upon the true view. Now Gi-Wook Do will give us the results presentation.

[Interpreted] Good afternoon. This is Gi-Wook Do. I will start with an overall results presentation for Q2. Please refer to Page 3. Q2 revenue at KRW 660.6 billion grew 14.4% Y-o-Y and 4.6% Q-on-Q with new title launches, including Ni no Kuni Global, with marketing expense increase with the new titles EBITDA at KRW 21.5 billion, saw a decrease by 48.6% Y-o-Y and 53% Q-o-Q. EBITDA margin rate was at 3.3%. Next page is on operating profit and net profit. In Q2, the company recorded an operating loss of KRW 34.7 billion, net [ profit ] loss of KRW 120.5 billion and controlling shareholders' net loss of KRW 118.3 billion. Nonoperating profit decreased by KRW 86 billion over the previous quarter. This was mainly due to the one depreciation and the resulting FX loss related to foreign currency borrowings. Next page is on revenue based on geography. Overseas revenue in Q2 was at KRW 558.5 billion. Overseas revenue contribution rose 1 percentage point Q-o-Q at 85%. The regional breakdown is as follows: North America, 49%; Korea, 15%; Europe, 12%; Southeast Asia, 11%; Japan, 8% and others at 5%. Next page is breakdown by genres. In Q2, our portfolio remains diversified with Casual games 47%; MMORPG, 22%; RPG, 22%; and others at 9%. Next page is on our diversified games portfolio. As of end of Q2, Ni no Kuni: Cross Worlds accounted for 10% of revenue; Marvel Contest of Champions, 10%; Cash Frenzy, 8%; Jackpot World ,8%; and Lotsa Slot, 8%; Seven Deadly Sins: Grand Cross, 7%. Next page is on major cost structure. Q2 operating expense was at KRW 695.3 billion, which is a 23.9% increase Y-o-Y; and 8.1% increase Q-o-Q. Fees and commissions paid was at KRW 260.8 billion. With increase in revenue, it increased 7.1% Y-o-Y and 6.2% Q-on-Q. Labor cost was at KRW 189.7 billion. With more head count with our new title development, it saw a 22.7% increase Y-o-Y; and 1.5% increase Q-o-Q. Marketing expense recorded KRW 144.4 billion, with multiple new title launches, including Ni no Kuni, it increased 43.8% Y-o-Y and 28.0% Q-o-Q. Lastly, on our lineup. In the second half of the year, there will be a reduction of 6 new games of which 3 uses blockchain technology. They are: Let's Get Rich: Meta World; Monster Arena Ultimate Battle and King of Fighters Arena. The other titles are Overprime, BTS Dream: TinyTAN House and Charlotte's Table. The company has accumulated experience and know-how related to blockchain and laid the foundation for our blockchain ecosystem creation. Since the market is quite young, the company continues to make various attempts. The gained experience in learning will positively affect future gains to come. New titles of different genres and platforms will be launched in the second half, and the company hopes to add much sophistication to them through various attempts and tests. The staff and management will further accelerate our efforts to show added development, and we look forward to your interest and support. This concludes my presentation. Now, we will be entertaining your questions.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be provided by Junhyun Kim from HSBC.

[Interpreted] I will give you the translation of the 2 questions. First question is related to marketing expense. Your marketing expense will arise in the second quarter with launch of several new titles. And I -- from your presentation gather that you also have plans to launch new titles in the third quarter, plus the second half of the year. So what is your forecast on marketing expenses going forward? And also, could you give us your expectation for the overall revenue in the second half of this year as well? And my second question, what is the major lineup that the company has high expectations for in the second half and also going into the year 2023?

[Interpreted] Yes. This is CEO Kwon addressing your question. Well, it's true that we saw a rise in our marketing cost in the second quarter. It was due the prelaunch marketing activities for Ni no Kuni and also with the launch marketing activities related to new titles. And well, there was free launch marketing activity for Seven Knights Revolution as well as there was also marketing activities after the launch. But going into the third quarter, there won't be any prelaunch marketing activities. There won't be much prelaunch in the third quarter. So we do foresee the marketing expense to slowdown in the third quarter. And with the new titles that were launched in the second quarter, it will be reflected in full starting the third quarter. So we do hope to see some rise in our revenue numbers as well. Yes. And our expectations for new launches in the second half. As was mentioned during the presentation, we will be launching 3 new titles that makes use of blockchain. And of them, we have big expectations for Let's Get Rich: Meta World. And as for our expectations in the first half of year 2023, we have plans to launch and introduce our Star Wars chronicles, and Only Eye Level Up, and Tower of God and Overprime and Hypesquad. They're all big titles, and with that, we do expect to see good revenue numbers going forward.

[interpreted] The following question will be presented by Jong Hwa Sung from Eugene Investment & Securities.

[Interpreted] Yes, I have 2 questions. First is on your labor cost. I believe that your labor cost was more or less similar to the level that you witnessed in the first quarter? And do you expect [indiscernible] going into the second quarter? And will there be any hefty incentive payments after this year, which will influence your labor cost? And well, the Seven Knights Revolution that you introduced, well, I believe the results from Seven Knights Revolution will be reflected the starting third quarter, and how is it performing to date? And do you have any future forecasts or expectations for Seven Knights Revolution? And my second question is related to your lineup that will be introduced in the second half of the year. You've given us some taste of your future titles lineup, but could you be please more specific and divide it into third quarter introductions and fourth quarter introductions?

[Interpreted] Yes, this is CEO Do addressing your question related to labor costs. Well, until recently, the development companies, the producing companies, they actively recruited new personnel in order to invest in their new titles. However, going forward, we will be giving more consideration to the macro aspect and on a group level, we would be seeing a limit to how much the headcount could grow. So going forward, there won't be much of a headcount increase and our labor costs will be maintained at the current level.

[Interpreted] Yes. This is CEO Kwon addressing your second question. Well, when it comes to Seven Knights Revolution, it's a bit less than what we have internally expected. But it's being serviced in a very steeper way, and we are readying ourselves for an update. And with that, we believe the results from Seven Knights Revolution will stabilize going forward and as to the breakdown by quarters. In the third quarter, according to the test results, Charlotte's Table could be launched in September. And as for the fourth quarter lineup, it will be mainly the blockchain technology using titles that we have mentioned.

[Interpreted] The following question will be presented by Hee-Seok Lim from Mirae Asset Securities.