Netmarble Corporation (A251270) Earnings Call Transcript & Summary

[Interpreted] Greetings. I'm [indiscernible], Head of Finance Planning at Netmarble. I thank investors and analysts for taking the time off of your busy schedule to attend Netmarble's 2024 Second Quarter Earnings Conference Call. On the site with us are CEOs, Young-Sig Kwon and Byeong Gyu Kim; and CFO, Gi-Wook Do. We will address any questions that may arise during the call after the main presentation. Please note that the contents of the earnings reports have yet to undergo an independent auditor's review and could be subject to changes with the audit results. And with this, CFO, Gi-Wook Do will present the Q2 earnings.

[Interpreted] Good afternoon. My name is Gi-Wook Do, and I will present overall 2024 second quarter earnings. Please refer to Page 2. Q2 revenue was KRW 782.1 billion, up 33.6% quarter-over-quarter and up 29.6% year-over-year. EBITDA was KRW 151.1 billion, up 253.9% quarter-over-quarter and up 1,299.1% year-over-year. EBITDA margin rate marked 19.3%. Q2 revenue and EBITDA marked largest in its scale since IPO, driven by new title launches and cost restructuring. Next page, we're seeing operating income and net income. Q2 operating income recorded KRW 112.2 billion (sic) [ KRW 111.2 billion ] and net income, KRW 162.3 billion. Controlling shareholders net profit marked KRW 169.5 billion. Net income was significantly improved, driven primarily due to liquidation of holding assets, resulting in an increase in nonoperating income. Next page, we are looking at game portfolios. At Q2 end, Solo Leveling:ARISE marked 20% of the total revenue, followed by MARVEL Contest of Champions at 9%; Jackpot World at 7%; Lotsa Slots by 6%; Cash Frenzy, 6%; and Arthdal Chronicles: Three Factions, 5%. The 3 new launches in Q2 have contributed largely to the quarterly revenue, successfully marking their position as key titles in Netmarble. Next is revenue ratio by region and genres. With the launch of Solo Leveling:ARISE in Q2, domestic [ portion ] increased by 7 percentage points Q-o-Q. And in genre-wise, RPG revenue portion increased by 12 percentage points Q-o-Q. Q2 regional breakdown of revenue contribution was 40% in North America, 24% in Korea, 13% in Europe, 10% in Southeast Asia, 6% in Japan and other regions 7%. Revenue contribution breakdown by genre is RPG 45%; casual games 34%; MMORPG 15%; and others 6%. Next is on major cost structure. Q2 operating expenses was KRW 670.9 billion, up 15.3% quarter-over-quarter and up 4.7% year-over-year. Royalty cost was at KRW 263 billion, which is 33.6% of Q2 revenue, down 5.2 percentage points quarter-over-quarter, largely due to increase in PC revenue with our own launcher. Personnel expense was KRW 182.7 billion, slight increase Q-o-Q due to base salary increase. Marketing expense was KRW 143.7 billion, mainly increased due to new launches in Q2. Next is on cost structure improvements. Netmarble has been working relentlessly to manage costs since 2022, and the outcome of such effort is coming to materialization. Royalty expense taking up the largest portion of operating cost of Netmarble and remaining at a level of 39% of revenue until last year was reduced to 35.9% this half of the year due to expansion of PC platforms. In particular, revenues from PC platform of Arthdal Chronicles: Three Factions and Raven2 launched in Q2 recorded over 50% of their total revenues, contributing to the improvement of royalty cost structure. As for personnel expenses, we are seeing a continuous decrease in costs due to cost reduction efforts and workforce streamlining, recording a quarterly average of KRW 181.1 billion this first half of the year compared to a quarterly average of KRW 194.9 billion in year 2022. Finally, marketing costs remained at a level of 19% of revenues until year 2023. This half of the year, we have reduced this cost to 17.9% of total revenues despite the 3 new launches through geo-targeted marketing and improvement of robust marketing competence. Netmarble will not rest here, but continue to work relentlessly to deliver solid earnings in the future through cost management. Next, I would like to announce our new game pipeline. In the remaining half of the year, Netmarble plans to successfully launch 4 new titles, including The Seven Deadly Sins: Idle Adventure; King Arthur: Legends Rise; RF Online Next; and Demis Re:Born. In the past 2 years, we have placed our primary focus in overcoming management crisis through 2 pillars of strategic focus: restructuring and prioritization. As a result, we have accomplished significant achievement this quarter, recording our highest ever quarterly revenue. We promised to strive our best to strengthen Netmarble's unique competitiveness and strong fundamentals in the remaining half of the year. We ask for your continued support in Netmarble. This concludes our earnings presentation. Should you have any questions, we will be happy to address them now.

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

[Interpreted] Congratulations on your remarkable results this quarter. I have 2 questions. The first one is, we understand that Netmarble has made tremendous results using the Solo Leveling:ARISE IP. We are curious about Netmarble's future plans on using IPs from other sources. Will Netmarble be using animate-based IPs as well? What are your strategies for selecting new IPs? My second question is regarding the Solo Leveling:ARISE. I am assuming that for the second quarter -- second half results of Solo Leveling, there will be massive updates. And we are curious to know the time line of these updates. And if you can reveal some of the information on the new launches in the second half of the quarter, that would be great.

[Interpreted] Thank you for your question. I am -- this is the CEO, Kwon, addressing your question, the first part of the question. We've actually shared our IP utilization strategy many times. But we want to -- I'd like to emphasize for more time that we want to utilize our own IP, our self-owned IP as well as to use the leverage of external IPs when necessary. Netmarble's IP strategy is to use our games to -- use the IP to gamify at its best. And when we find it necessary and when we find the best IP possible, we will not hesitate to use external IPs as well. Regarding Solo Leveling:ARISE, we do have main story updates -- major story update in September and December. We also have a Guild system update in August as well as major content updates in October and November. And regarding the new launch update other than the ones that we have revealed during this conference call, we do have new projects, 5 or 6 projects coming up in 2025, and we will be able to reveal this information when we are ready.

[Interpreted] The following question will be presented by Seokoh Kang from Shinhan Investment and Securities.

[Interpreted] Congratulations on your remarkable results this quarter. I have 3 questions. The first question is, among the 4 titles -- 4 new launches in the half quarter, what is the projects that we can expect the largest scale of revenue on? And how much marketing spend do we expect to spend on this title? My second question is we understand that Netmarble is still spending very much on its interest, although I understand that we have sold the HYBE shares. What are Netmarble's plans in repaying these borrowings? My third question is, The Seven Deadly Sins' origin has been the most expected title during -- among the titles that have been announced at the G-STAR. When will this project be launched? And what are the marketing plans for this project?

[Interpreted] As you know, in the game industry -- this CEO, Kwon addressing your first question. As you know, the game industry is based -- highly based on trends. So it's really -- it's a very difficult question for us to answer to tell you which gain is the most highly expected in terms of revenue. I have to say that the titles that will be launched earlier will be the title that will be contributing the most to the revenues. In terms of marketing costs, we plan on -- we have a planned budget for marketing at 20% of revenue, and this is the amount of margin spend that we expect to spend on this title as well.

[Interpreted] This is CFO, Do, addressing your second part of the question on repayment borrowing plan. As you probably know Netmarble placed its repayment of our short-term borrowings as one of our primary strategies. And we have to be very flexible. And since it's very difficult to predict the market situation, we have to understand the entire environment and be flexible in terms of scheduling for the repayment of borrowings.

[Interpreted] This is CEO, Kwon, again, addressing your third question on Seven Deadly Sins' origin. We plan on launching this title at Q2 of 2025. And in terms of marketing, Netmarble will be fully in charge of PC and mobile marketing, whereas for PlayStation marketing, we will be doing marketing with [ Sony ]. And I hope this answers your question.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] This concludes 2024 Q2 Netmarble Earnings Conference Call. Thank you for your attendance. And should you have any additional questions, please do not hesitate to contact the Netmarble's IR team. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]