Netmarble Corporation (A251270) Earnings Call Transcript & Summary

Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the Fiscal year 2023 second quarter earnings results by Netmarble. This conference call will start with the presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 second quarter earnings results by Netmarble.

[Interpreted] Good afternoon. This is [indiscernible] from Netmarble's IR team. I would first like to thank investors and analysts for taking time out of your busy schedules to attend Netmarble's 2023 Q2 earnings session. Here with us are CEO, Young-Sig Kwon; and Gi-Wook Do and other company representatives. They will address your questions after the results presentation. Please note that the contents presented today have yet to undergo an independent auditor's review and could be subject to changes upon such review. With that, CEO, Gi-Wook Do, will deliver the results presentation.

[Interpreted] Good afternoon. This is Gi-Wook Do. I will go over the general results of Q2. Please refer to Page 2. With the update of Contest of Champion, revenues in Q2 increased 0.1% Q-o-Q and decreased 8.7% Y-o-Y at KRW 603.3 billion. With marketing expense increase with new titles, EBITDA decreased 46.3% Q-o-Q and 49.8% Y-o-Y at KRW 10.8 billion. EBITDA margin rate recorded 1.8%. The page is on operating and net profits. Q2 saw an operating loss of KRW 37.2 billion and net loss of KRW 44.1 billion and controlling shareholder loss of KRW 27.1 billion. With nonoccurrence of dividend income that was already reflected in Q1, nonoperating income and loss decreased by KRW 2.1 billion over the previous quarter. Next page is on regional revenue breakdown. Overseas revenue in Q2 recorded KRW 519.1 billion. The contribution from overseas revenue increased 2 percentage points over the previous quarter at 86%. The regional breakdown is as follows: North America 52%; Korea, 14%; Europe, 12%; Southeast Asia, 10%; Japan 6% and others 6%. With the Marvel Contest of Champions update, North America's revenue share increased 4 percentage points Q-o-Q. Next page is on revenue mix according to genres. As of Q2, our portfolio continues to be diversified with casual games 48%, RPG 30%, MMORPG, 13%; and others 9%. With Marvelous Contest of Champion's update, contribution from RPG rose 3 percentage points. Following page is on game portfolio. As of Q2 end, Marvel Contest of Champions accounted for 12%, Jackpot World 10%; Cash Frenzy 9%; Lotsa Slots 8%, Seven Deadly Sins going past 6% and the company's game portfolio remains diverse. Next page is on major cost structure. Operating costs at Q2 was at KRW 640.5 billion, which is an increase of 1.5% Q-o-Q and a decrease of 7.9% Y-o-Y. Fees and commissions recorded KRW 240.3 billion, which is a 2.8% decrease Q-on-Q and 7.9% decrease Y-o-Y with cost efficiency measures in place. Labor costs recorded KRW 193.2 billion. With one-off severance-related payments, it increased 3.0% Q-o-Q and 1.8% Y-o-Y. Lastly, our marketing cost stood at KRW 113.1 billion. With upfront marketing budget execution with new title launch, it increased 12.8% Q-o-Q and decreased 21.7% Y-o-Y. Now, on our new title lineup. In second half of '23, 7 global new titles including Arthdal Chronicles, Solo Leveling: ARISE and 3 China market releases including Seven Deadly Sins, Ni no Kuni: Cross Worlds is planned. The company is planning to launch diverse new titles, starting with Tower of God: New World. We more than ever are paying close attention to each and every project. The company hopes to deliver new joy to our users with differentiated and sophisticated new titles, and we'll do our best to see our efforts to reach fruition. So I look forward to your interest. This concludes our results presentation. Now we will be entertaining your questions. Thank you.

[Foreign Language] [Operator Instructions] [Interpreted] The first question will be provided by Sang-Hyun Lee from IBK Investment & Securities. Please go ahead with your questions.

[Interpreted] Yes, I will give you the translations to the 2 questions first. First is on your new title Tower of God, has it met your internal expectations? And what is your position on the titles that will be introduced going forward? This is the first question. And now on the second question, well, I've seen slide right in your marketing cost and also labor and what is your forecast related to these expenses.

[Interpreted] Yes. This is CEO, Kwon addressing your first question. We've launched the Tower of God on July 26 and the indices from the domestic market is very promising. The revenue retention rate, it's more than our expectation. And we take it for our global brand launch, but the marketing activity so far has been concentrated in the Korean domestic market. And if we look at the naturally attractive global users indices, it's pretty much similar to what we have witnessed with the launch of our Seven Deadly Sins title. So we will commence our global marketing activity, starting with the Western market, and we do have high expectations from that market and also from Japan as well. And let me briefly elaborate on our new title launch time line of the AGE OF TITANS, it's expected for a global launch tomorrow. The Seven Knights Idle Adventure, it would be introduced soon [Foreign Language ] at the earlier part of September. And King Arthur: Legends Rise, that's also stated for the month of September. And everybody's Marvel 2 slated for November this year for the domestic market. Solo Leveling: ARISE and Arthdal Chronicles, we are aiming for a date somewhere in the fourth quarter. And we are working with Sony for concurrent reduction of the console version as well.

[Interpreted] Yes. This is CEO, Do, addressing your second question. We did see a slight increase in our loss numbers -- operating loss numbers in the second quarter, mainly due to our marketing expense and labor.

[Interpreted] Yes. Well, as we've mentioned during the presentation, we've launched the new titles in the second quarter. And with that, we did see marketing expense rise on a Q-o-Q basis. And compared to the first half of this year with more title launches, we do expect to see marketing expense see further growth in the second half as well. But however, speaking for the whole year or the year as a whole, since the market expenses are related and conjoined with the new type of launches, if you look at the percentage terms of marketing expense to our revenue, it will remain steady. Now on labor.

[Interpreted] Yes. Well, the rise in our labor cost in Q2 was mostly because of the severance payment related to our overseas subsidiaries. And this is a one-off event. And starting from Q3, it would be back to the level that we have witnessed in Q1. So our basic stats when it comes to expenses and cost remains as we have told you in the beginning of the year, we will be constantly monitoring and managing efficiency so you won't be seeing much of a big increase. We will entertain the next question, please.

The following question will be presented by [ Jingu Kim from Kim Securities ]

[Interpreted] Yes, I will give you a translation to the 2 questions. First, it's about your Chinese business. So you have plans to release titles in the Chinese market in the second half of this year. So what's the pre-subscription status like? And could you please elaborate on the detailed schedule in your Chinese market. And my next question, I believe that the title that you would be introducing in earnest next year will be first introduced at the G-STAR event. Could you please give us more color on what titles would be introduced at G-STAR.

[Interpreted] Yes, this is CEO, Kwon once again addressing your question. On the Chinese business question, well, [indiscernible] is a publisher in the Chinese market. So I don't think it's appropriate for us to be elaborating on concrete numbers. But if I may give you a brief time line, The Seven Deadly Sins title, it will be introduced somewhere in September. And Ni no Kuni, well, we need further development on that title. So I believe that it will take several more months to complete and probably will be meeting the users in end of Q4. We are getting pre-subscription for the 2 mentioned titles, and we believe that $5 million plus is quite doable. Yes. At the G-STAR event in '23, we are going to introduce 1 Open World RPG and 1 CCG and 1 MMORPG. But just prior to the after G-STAR event, we will be engaging in many PR and marketing activities through which you will be able to get more detail. Next question please.

The following question will be presented by Ui Hoon Jeong from Eugene Investment Securities.

[Interpreted] Yes. I would translate the 3 questions. First is on the 3 game [ clusters ] of SpinX. So how do you see the North American social casino market like year-on-year forecast or your view on the North American social casino market? And my second question is on your development directionality. This year, you have introduced various new types? And would it be the same stance in year '24? So this second question was on your development directionality. And my third question is on your stakeholding of other companies or what will you be doing with that investment?

[Interpreted] Yes. This is CEO, Kwon addressing your first question on the North American social casino scene. Well, we do not expect to see exponential growth in that category. However, we have been focusing on enhancing the user quality. So the strategic direction of SpinX going forward is to introduce new titles using casino IPs and at the same time enhance the quality of the users. Yes. As you have stated in your questions, we have introduced a lot of new titles in '23, and we are working on several titles to be introduced in '24. So when it comes to years after that, I think the number of new titles will be somewhat limited. And our basic approach is to go from multi-platform, meaning console, PC and mobile.

[Interpreted] Yes. This is CEO, Do. I will take the third question. Yes, our stakeholding or equity investments in other countries. Well, when it comes to divestment assets, well, you could link it to our liability or borrowing level. Yes. Well, when we met you in the first quarter, we did talk about our borrowings. The borrowings were foreign currency denominated and were cited for redemption or servicing at October this year. However, we were able to refinance using one borrowing in June. Yes, this means that our foreign currency-denominated borrowings have been replaced and refinanced with 1 borrowings, which eliminates the currency risk of foreign currency exchange risk so we are enjoying some of the hedging effect. And while the refinancing was done in June, which means we will be seeing maturity in June. So at the beginning of this year, we did communicate with the market on securitizing our assets for redemption purposes. So at this given point in time, I cannot tell you how or when the servicing will be done. But as you would have noted, we would be having borrowing maturing by June next year. So we would have to make preparations for redemption of that borrowing. So having said that, we're not going to maintain the borrowing level of today. We will be in the near run, looking at various methods to servicing down our borrowing level.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] This concludes Q2 2023 earnings release section by Netmarble. I thank you for your participation. And should you have any follow-up questions, please don't hesitate in contacting our IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call]