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 2022 third quarter earnings results by Netmarble. This conference call will start with the presentation followed by [indiscernible] Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2022 third quarter earnings results by Netmarble. Good afternoon, this is [indiscernible] from Netmarble's IR team. I sincerely thank the investors and analysts for participating in Q3 2022 earnings session of Netmarble despite your busy schedules. With us here today are CEO, Young-Sig Kwon and Gi-Wook Do; and Head of Global Business, Seungwon Lee. They will address your 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 such review. Now CEO, Gi-Wook Do will give his presentation.

[Interpreted] Good afternoon. This is Gi-Wook Do. I will give you an overview of our Q3 results. Please refer to Page 3. Results from new titles that were released in Q2, including that Ni no Kuni Global have been reflected in full in our Q3 results. And with new title launches, including Seven Knights Revolution, our revenue grew 14.4% Y-o-Y and 5.1% Q-on-Q at KRW 694.4 billion. EBITDA decreased 64.4% Y-o-Y and 3.3% Q-on-Q at KRW 20.8 billion due to one-off severance payment related to Jam City. EBITDA margin recorded 3.0%. Next page, based on operating and net profits. Q3 recorded an operating loss of KRW 38.0 billion, net loss of KRW 277.5 billion and controlling shareholder loss of KRW 245.3 billion. Non-operating numbers decreased KRW 118.3 billion Q-on-Q, mainly due to increase in foreign exchange loss due to foreign currency denominated borrowings with depreciation of won. Next is on regional revenue contribution. Q3 overseas revenue recorded KRW 579.4 billion. Overseas revenue contribution decreased by 2 percentage points over the previous quarter at 83%. The following is a regional breakdown: North America is 48%; Korea, 17%; Europe, 13%; Southeast Asia, 9%; Japan, 7%; and others, 6%. Korean contribution increased 2 percentage points Q-on-Q with the launch of Seven Knights Revolution. Next page is on our genre. In Q3, casual games accounted for 47%, RPG 24%, MMORPG 21% and others 8%. Our genre remains diversified. With the effect from Marvel Contest of Champions update, RPG revenue contribution has increased 2 percentage points Q-on-Q. Next page is on our game portfolio. As of end of Q3, Marvel Contest of Champions accounted for 11%; Cash Frenzy, 8%; Ni no Kuni: Cross Worlds, 8%; Jackpot World, 8%; Lotsa Slots, 8%; The Seven Deadly Sins: Grand Cross, 6%. Our portfolio remains diversified. Next is on our major cost structure. Operating expense in Q3 recorded KRW 732.4 billion, which is an increase by 26.2% Y-o-Y and 5.3% Q-on-Q. Fees and commissions paid recorded KRW 278.5 billion. With increase in sales, it rose 9.4% Y-o-Y and 6.8% Q-on-Q. Labor cost was at KRW 203.0 billion. With one-off severance payment related to Jam City, it rose 28.6% Y-o-Y and 7.0% Q-on-Q. Marketing costs recorded KRW 144.9 billion. With the influence from new title launches, including Disney Mirrorverse that was introduced on June 23, it increased 44.3% Y-o-Y and slightly rose at 0.3% against the previous quarter. Now on our new lineup for Q4. Charlotte's Table was launched on November 9, and The King of Fighters ARENA will be formally launched on November 14. In December, early access will be available for Paragon: The Overprime. The company participates in the G-Star event in November, 4 new titles will be introduced. Paragon: The Overprime, which combines third-person shooting with MOBA; Arthdal Chronicle, which is a seamless open world MMORPG; and Solo Leveling: ARISE based on the globally popular Webtoon IP; and Hype Squad, real-time based Battle Royal that takes place in the future city. The company is [indiscernible] big titles in diverse genres and I look forward to your interest. Lastly, the games Netmarble has introduced this year in many parts did not meet the expectations of the market. The company is attempting structural changes with amendments in internal strategy in line with the fast change in market conditions with realigning of new projects. Based on learnings from our past trial and errors, we will introduce new titles with high gameability that will satisfy users, both home and abroad. I look forward to your support and interest.

[Interpreted] This concludes our results presentation. Now we will be addressing your questions. Thank you.

[Interpreted] [Operator Instructions] The first question will be presented by Hung from Ui Hoon Jeong from Eugene Investment and Securities.

[Interpreted] Yes, I will give you the translation of the 2 questions. First, I would like to hear more about the results. [indiscernible] could you elaborate on why? And now, well, on to the second question, we've seen negative results for 2 consecutive quarters. And what is your outlook for the fourth quarter and full year '23?

[Interpreted] Yes. This is Gi-Wook Do addressing the first part of your question. Well, the top line is really dependent on what kind of new titles introduced in the pipeline, in the lineup. And as was mentioned in my presentation and the new titles that were introduced this year were rather wanting in terms of performance. And if I may talk about the cost structure, well, there are major cost items, including labor cost. And as [indiscernible] mentioned, that we should be adding some efficiencies to our labor cost. So it is a work in progress. We are continuing our efforts to have more efficiency to our major cost items. The efforts will continue long into the future, including the fourth quarter. So when it comes to fixed cost related to labor, we've worked on it. So there will be a little bit of pressure from this fixed cost element. However, when it comes to marketing, we will be exercising more flexibility with new title launches. So to sum it up, on the top line, we will be working with our new type of lineups and launches. And as for cost that we will have -- we will be working on adding more efficiency to our fixed cost. And we will add more efficiency in executing our fees and commissions and also marketing expenses.

The next question will be presented by [indiscernible].

[Interpreted] Yes, I have 2 questions. First, you've mentioned cost control in your previous answer. Could you give us more color on what kind of cost control measures there would be? And will there be any policy-wise changes when it comes to your labor cost? Would there be any headcount changes? And would there be any incentive-related changes for the company and also related to your subsidiaries? Well, could you mention the amount of severance pay that was related to the Jam City? And my second question is related to marketing. So could you give us more color as to what kind of marketing spending you will be witnessing going into the next year? Well, you could talk about the percentage to revenue? Or you could also go by other metrics. And you talked about adding efficiency to your marketing budget execution. Could you give us more detail on that as well?

[Interpreted] Yes. This is CEO, Gi-Wook Do once again, and I will be addressing your labor-related question. Well, I've told you this in our last presentation, in our last quarterly presentation, well, in the past, there was a basic stance to go for more aggressive investment in terms of talent. But going forward, we hope to add more efficiency to our labor. So it won't be much of an aggressive growth in developer numbers, but we will be adding more efficiency to our existing human resources, while this does not indicate an active restructuring on the part of our labor structure. And as to Jam City and the severance payment paid out, well, we had an overall check of our overseas projects and had to tie these to some of our lesser effective or efficient projects. So this -- the case will not spread to the overall company nor to the domestic market. So it will be a determination more or less on a project basis on a case-by-case basis. So once again, our basic stack going forward is to add more efficiency to our existing headcount and go for more selection and focus.

[Interpreted] Yes. This is CEO, Young-Sig Kwon addressing your question related to marketing directions and also on our ways to add more efficiency to our marketing budget. So 4 entities, they were in charge of executing our marketing budget. They are Netmarble for the domestic real market and Jam City, Kabam and SpinX. So well, Netmarble, well, it was given the task of doing marketing activities for the Korean market plus that we also had a look at the global market because we wanted to grow the global business with our RPG titles. And our past attempt, it did give us some experience. But in total, we were rather wanting in terms of international experience. So going forward, starting from year '23, there will be more focus on the Asian market, including the domestic market, and there will be new title launches accordingly. So in the past, since we had a heavy focus on overseas businesses, our performance in the domestic market was somewhat wanting and we will be shifting the strategies to focus on the domestic market. That would be our launch strategy going forward, and our marketing strategy will also follow suit. And as to how will we be executing our marketing budget in a more efficient way? Well, if you remember, between Q1 and Q2, there was a period where casual games really performed well. And at that given point in time, we really went for aggressive marketing with Jam City and SpinX. So likewise, if we see [indiscernible] for specific genres, we will go for a more aggressive marketing for that target. If not, we would, of course, take the other way.

The next question will be presented by Jae-min Ahn from NH Investment & Securities.

[Interpreted] I have 2 questions. First is on SpinX. After your acquisition of SpinX, I heard there have been some financial burden related to the acquisition. So could you please tell us the other correct details of SpinX? What is revenue like and what is the operating profit level like? And I would like to know more about the SpinX company as a whole? And my second question is related to your foreign currency denominated debt. Well, will this situation ease with more settlement or more stabilization in the foreign currency exchange market? What is your foreign currency denominated debt profile like?

[Interpreted] Yes. This is CEO, Gi-Wook Do addressing your SpinX question. Well, if you look at the social casino market with the pandemic situation being switched to an endemic situation, we have seen an overall decrease of the market itself. But with the given environment, SpinX is relatively performing well. Jackpot World, Cash Frenzy, Lotsa Slots, releases have performed well, and we have plans to launch a new title in the next year. And as it comes to the market, our focus has been on the mobile platform, but we will be going for better versions in the web and PC platform as well.

[Interpreted] Yes. Now on to the second part of your question, which was related to our foreign currency denominated debt, borrowing as well. And as you're well aware, won has depreciated by about 20% compared to the earlier part of this year. So when we borrowed at the time of acquisition of SpinX, the borrowing amounted to KRW 1.5 trillion and with fluctuation in foreign currency, we're feeling the pinch in every quarterly report. But this is an appraisal value. And with foreign currency changes, we will also be seeing changes in the value as well. But going forward, we're going to work on the level of debt. Well, in the fourth quarter, we will be servicing back KRW 300 billion. And through dividends from our subsidiaries or through asset securitization, we will be working on our debt level. So once again, if I may recap the -- it's an evaluation loss according to foreign currency exchange rate changes, and with our scheduled redemption with dividends from our subsidiaries and also possible asset securitization in order to work on our debt level.

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

[Interpreted] Yes. I have several questions. First is on your new titles to be introduced at G-Star. Well, how are they being developed? [indiscernible] Let's Get Rich: Meta World and other titles to be introduced? Well, what's the schedule like? Are they in accordance to your original scheduling? So this is my first question. And my other question is related to your titles that were introduced at G-Star? So when is the official launch date for the titles that are going to be exhibited at the G-Star Convention? And my other question is related to the SpinX acquisition. It's been almost a year after your acquisition of SpinX. So you've acquired a social casino genre company and you paid a hefty premium for that. And as you've mentioned in your presentation compared to other's social casino companies, SpinX has [indiscernible] position, but is it enough to justify the hefty acquisition price of KRW 2.6 trillion? And has that acquisition led to any synergy effect with your other existing businesses or other existing genres in terms of collaboration and marketing? Well, is it enough to justify the acquisition price?

[Interpreted] Yes, this is CEO, Young-Sig Kwon, and I will be giving you an overall launch schedule of our new titles. So the -- Let's Get Rich: Meta World, it's scheduled for release in first quarter next year. And Paragon: The Overprime, as was mentioned in the presentation, there will be early access servicing starting from December and this service will continue. We will find any glitches and make the required improvement and there will be a formal launch accordingly. And for Arthdal Chronicle, it's scheduled for launch in third quarter year '23 as well as the Solo Leveling: ARISE, that will also be launched in Q3. And the Hype Squad, that's scheduled for launch in the second quarter. And as for [indiscernible] game title. Well, we've conducted our internal test and found it more wanting. So we dropped the project. Yes. Now to the SpinX question, well, about a month ago, we've asked an independent research institution for a report covering years '22, '23, '24 on the social casino sector. So it's true that compared to year '23, the overall social casino market has seen a decrease. If you look at the performance of top 10 social casino companies, their overall revenue has seen a shrink in year 2022 compared to year '21. When it comes to SpinX, they're still on a growth trajectory. Maybe it may not be as high as what we have anticipated or expected, but still they are on a growth trajectory. Yes. And the reasoning behind our acquisition of SpinX, we wanted to have a social casino genre platform, and we wanted the company to be our cash cow. And with this reasoning, we've acquired SpinX and as you're well aware, the social casino market has seen a downturn as a whole. And while having said that, SpinX still does not service the web and PC versions. But if you look at the other social casino players out in the market, about 20% to 30% of their revenue comes from the web and PC platforms. So should we introduce the web and PC version for a SpinX, while we would be enjoying this much of a growth going into the future. So this is our expectation. And as to your question on the acquisition price itself, we've been into a year after the acquisition. And by the end of this year, accounting-wise, we would have to do a-self-check whether the acquisition [indiscernible]. So at this time, we can't say for sure, but we believe that there needs to be an assessment within the company, well, that could probably take place in the fourth quarter.

This concludes the Q3 year 2022 earnings release session of Netmarble. I thank you for your participation. And should you have any follow-up questions, please don't hesitate in contacting us. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]