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 for the Fiscal Year 2022 Fourth Quarter Earnings Results by Netmarble. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2022 fourth quarter earnings results by Netmarble.

Good morning. I am [indiscernible] of Netmarble's IR team. I would like to sincerely thank investors and analysts for joining Netmarble's 2022 fourth quarter and full year earnings release conference call despite your busy schedules. Today, we have CEO, Young Sig Kwon; CEO, Gi Uk Do; President of Global Headquarter, Seungwon Lee, and other members here to answer your questions after the earnings release presentation. Please note that contents we will be presenting to you have been prepared before the completion of the external audit. Thus, some contents may change subject to the audit outcome. And now, CEO, Gi Uk Do, will deliver the earnings release presentation.

[Interpreted] Good morning. This is Gi Uk Do. Let me begin the presentation with a 2022 full year earnings summary. Please refer to Page 3. 2022 annual revenue was KRW 2,673.4 billion, a growth of 6.6% Y-o-Y. For the 2022 revenue breakdown, overseas revenue share was 84% and Korea 16%. EBITDA was KRW 127.8 billion, a decline of 57.6% Y-o-Y due to the increase in operating expenses from the full quarter recognition of earnings from SpinX and Ludia. Next, Page 4, overview of the Q4 earnings. Q4 revenue was KRW 686.9 billion, a fall of 1.1% Q-o-Q and a fall of 8.7% Y-o-Y due to the absence of mega new title and downward stabilization of the previous launched games. EBITDA was KRW 39.8 billion, an increase of 91.3% Q-o-Q, but a fall of 67.1% Y-o-Y with the overall cost reduction, including marketing costs. EBITDA margin was 5.8%. Next page shows operating profit and net profit. In the fourth quarter, operating loss was KRW 19.8 billion, net loss was KRW 456.6 billion, and net loss controlling basis was KRW 410.4 billion. Non-operating income decreased by KRW 160.3 billion Q-o-Q and the main reason for the decline was the recognition of intangible asset impairment. Next page shows the revenue breakdown by region. In Q4, overseas revenue was KRW 581 billion. The share of overseas revenue grew by 2 percentage points Q-o-Q to 85%. By region, North America was 51%, Korea 15%, Europe 12%, Southeast Asia 8%, Japan 7% and others 7%. The share of North America's revenue grew by 3 percentage points Q-o-Q due to Marvel Contest of Champions event and et cetera. Next page shows the revenue breakdown by genre. In Q4, casual games was 48%, RPG 27%, MMORPG 16%, and others 9%. We continue to maintain a well-diversified portfolio. The share of RPG's revenue grew by 3 percentage points Q-o-Q from Marvel Contest of Champions event and the update of The 7 Deadly Sins: Grand Cross. Next page shows our game portfolio. As of the end of the fourth quarter, revenue share of key titles, Marvel Contest of Champions was 13%, Jackpot World 9%, Cash Frenzy 8%, Lotsa Slots 8%, The 7 Deadly Sins: Grand Cross 7%, Ni no Kuni: Cross Worlds 5%, and et cetera. Also, our game portfolio continues to be well diversified. Next page shows the major cost structure. In Q4, operating cost was KRW 706.7 billion, a fall of 3.5% Q-o-Q, but an increase of 1.2% Y-o-Y. Commission was KRW 271.4 billion, a fall of 2.5% Q-o Q and a fall of 4.1% Y-o-Y from the decline in revenue. Labor was KRW 199.8 billion with a smaller size of labor and this represents a fall of 1.6% Q-o-Q, but an increase of 5.2% (sic) [ 9.2% ] Y-o-Y. Marketing was KRW 122.2 billion, a fall of 15.7% Q-o-Q, but an increase of 0.5% Y-o-Y from the absence of a new blockbuster title. Next, new lineups. In the first half of 2023, we are preparing the releases of Meta World: My City, which uses real estate NFT; Grand Cross W, the next-generation strategy simulation; and Tower of God: New World, a high-quality 3D cartoon-type RPG. In the second half of 2023, we are planning the releases of Arthdal Chronicles, a seamless open-world MMORPG; Solo Leveling: ARISE, based on a globally popular webtoon IP; Project Knights, a strategy MMORPG based on the story of King Arthur; and 7 Knights Idle Adventure, a successor of 7 Knights 1's universe. Other than the games that I have just mentioned, in 2023, we're also preparing to release new titles such as Paragon: The Overprime, which combines third-party shooting and MOBA genre; and Hype Squad, a real-time battle royale genre. Moreover, in 2023, we're also preparing the launch of 4 games that have been issued publishing licenses in China, starting with A3: Still Alive. We plan to roll-out also Shop Titans, Ni no Kuni: Cross Worlds and StoneAge. StoneAge leverages the StoneAge IP. Out of these games, Ni no Kuni: Cross Worlds is planned to be serviced through Tencent. As we're preparing for the service launch in China, that we have waited a long time for, we are exerting our best efforts to create meaningful performance and we ask for your great interest in the developments. It is true that in 2022, we were unable to meet market expectations due to the lackluster earnings performance by multiple new titles. However, in 2023, we want to overcome the management crisis through improving our fundamentals by prioritizing our plans to be more selective and focused, as well as through strong and thorough cost controls. For this end, we are planning to release, not only Solo Leveling: ARISE that received favorable reviews at the G-STAR 2022, but also well-made high-quality new titles representing diverse genre in multi-platform. Also, we have a total of 4 titles to be released in China, including Ni no Kuni: Cross Worlds to be published by Tencent. Thorough preparations are being made for all the games that are scheduled to be released this year to ensure that our various trials, challenges and efforts that we have made up to now have not been made in vain and we will exert our best efforts to showcase mega new titles that will offer new experiences and entertainment. I ask for your continued interest and encouragement. Thank you. This concludes the earnings presentation. We will now begin the Q&A session. Thank you.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be presented by Ui Hoon Jeong from Eugene Investment & Securities.

[Interpreted] I have 2 questions. The first question is related to the net loss that you have experienced in the fourth quarter of 2022. It has declined significantly on a Q-o-Q basis. Could the company please tell us the main reason behind it? My second question is related to the overall outlook for the revenue and profitability for the company for, not just the first quarter, but full year 2023. And I would also like to understand better if the company will continue to make efforts to make its cost structure more efficient so that it also improves its financial structure.

[Interpreted] This is Uk Do, and I will address the questions that you asked one by one. In respect to the fact that in the fourth quarter of 2022, our net income had actually declined significantly. This is mainly related to the impairment of the intangible assets as a result of us acquiring SpinX. Now, with the SpinX, in terms of the overall performance, it has not actually met the expectations that we had at the time of acquiring our SpinX, but this is mainly because of the external market situation that we were not able to capitalize on the performance of SpinX as we had intended. But it is not a situation that is only confined to SpinX, it is really the market, specifically, the social casino sector is going through an overall restructuring. And so, we believe that the situation is more one-off and short-term temporary basis. Now, moving on to your next question related to the outlook for 2023, and earlier during the presentation, we shared with you our new lineups that we are planning for this year. Now, if I just focus on the first half lineup, these new titles will be focused and be launched and released in the second quarter. We don't actually have a new title release scheduled for the first quarter, which means that in the first quarter, we're not going to be able to see meaningful improvement in our earnings performance. But as we move through the second quarter of this year, we'll start to see improvement and really turnaround to really pick up speed starting from the second half of 2023. And lastly, you also talked about the company and tuning its efforts to improve its cost structure. And as you have seen in the actual performance that we showed in the fourth quarter cost structure, whether you're looking at the marketing numbers or the labor numbers, you can see that on a Q-o-Q basis that these costs have not actually increased compared to the third quarter of 2022. And so, what we actually delivered in fourth quarter is not just a one-off temporary performance, but it's something that you can expect throughout 2023. The focus for the company for this year 2023 is to continue to focus on tight cost management. And so, I believe that if you actually look at our cost side, we're not going to see any significant increase compared to what we just shared with you for the fourth quarter and that volatility will be extremely low for the cost side.

[Interpreted] Your next question will be presented by Sang-Hyun Lee from IBK Investments & Securities.

[Interpreted] I have 2 questions. And the first question is related to your overall new title release schedule. I would like to understand specific release timetable for not only Meta World: My City, but also for other new titles that you are planning to release. And at the same time, I move on to my second question, and this is specifically for China as you are planning to release titles such as Ni no Kuni, I would like to better understand all the games that you will be releasing in China, what is the release schedule and who are the publishers.

[Interpreted] This is Young Sig Kwon. Good morning. And let me just speak about the more detailed schedule related to the lineups that we have prepared for 2023. If I were to speak all on a quarterly basis, if we look at what's going to happen for the first half of the year, we have 3 titles that we are scheduling to launch in the second quarter. So specifically, I'm talking about Meta World: My City, Grand Cross W and Tower of God: New World, which has already been communicated to you during our earnings release presentation. We also have 4 titles to be released in the second half of 2023, mainly Arthdal Chronicles, Solo Leveling: ARISE, Project Knights, and 7 Knights as well. And so we have these titles that we will be launching in the first half and second half of 2023. Moving to Paragon: The Overprime, we actually started the early access in December 2022 and if you understand team service, in terms of what we do is that we do early access and we continue to monitor the metrics and performance of the game and then once we actually see a positive sign, then we actually decide the actual timeline in terms of the official launch. But at present, for the Paragon: The Overprime, we're working very hard to make sure that we are seeing good performance even at the early access stage. And of course, this process also applies to what we also have lined up for the new title, which is Hype Squad as well. So we also plan to launch Hype Squad this year as well and it will be also the same approach with the early access and seeing positive numbers growing. And moving to your question on the China side, as you're well aware, our company has received publishing licenses for 4 titles, but for these 4 titles, we actually have different publishers. So other than the publisher Tencent that we have mentioned, I'm not actually at liberty to mention the other 3 publishers because we have not actually completed our discussions whether or not we're going to make a public announcement related to this. So please understand that I'm not able to share the names of the other 3 publishers. And in respect to what we have been able to agree upon and discuss so far, we are scheduling to launch 3 titles, A3: Still Alive, Shop Titans, and Ni no Kuni -- sorry, StoneAge, sometime between the second quarter and third quarter of this year in China and then in the fourth quarter, we believe that we'll be able to release StoneAge. Sorry, Ni no Kuni: Cross Worlds.