Pearl Abyss Corp. (A263750) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the Fiscal Year 2019 Fourth Quarter Earnings Results by Pearl Abyss. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now we should commence the presentation on the Fiscal Year 2019 Fourth Quarter Earnings Results by Pearl Abyss.

[Interpreted] Greetings. I'm [ Jong Jin Gyu ], head of the finance team at Pearl Abyss. First of all, I express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2019 Q4 Pearl Abyss earnings presentation despite your busy schedules. Before elaborating on today's business results, I would like to ask for your understanding regarding the following: the financial and business results contained in today's earnings release have been prepared for the convenience of investors and is subject to change depending on the final closing of our books. In addition, the accuracy and completeness of the financial and business results in the earnings results materials are not guaranteed, and the company is not obliged to give updates of the accounts given after this date. So please take these factors into consideration. We have here with us in the earnings presentation today our CEO, Jung Kyung In; CBO, [ Kim Jong Man ]; COO, Heo Jin Young; and CFO, Cho Seok Woo. We will first hear the business performance presentation highlights from our CFO, Cho Seok Woo, and then engage in a Q&A session.

[Interpreted] Greetings. I am Pearl Abyss CFO Cho Seok Woo. Once again, thank you for taking part in our company's earnings call despite your busy schedules. First, I would like to elaborate on 2019 major business activities and performance. In 2019, we focused on strengthening our portfolio and concentrated on securing our future growth drivers. First, we entered into the global market based on the platform expansion of Black Desert IP. I will first like to explain about the console market. Although the console market has almost no major MMORPGs, we saw new market opportunities when we saw console devices being connected to the Internet. Accordingly, Black Desert pioneered the market and launched Xbox in March and PlayStation in August. Unlike the mobile platform, the console platform is showing similarity to the PC platform, and rather than posting a revenue peak upon launching, it is maintaining and continuing stable revenue growth. Accordingly, looking at the net user settlement or payment amount, excluding publishing contract and accounting deferral, the settlement of accounts -- amount of users on the console platform was 17% of the total amount and became a stable profit basis for us. In addition, we successfully launched Black Desert Mobile in Japan in February and started to service Black Desert Mobile globally in 150 countries in 7 languages from December. There were many challenges, including the device specifications, network issues and differences in user behavior and the fact that we needed to pioneer the mobile MMORPG market. However, based on the strength of Black Desert IP and the technical capabilities that we have, we were able to overcome them and currently are achieving great results in those markets. In addition, through about one year of preparation and hard work, we launched EVE Online in Korean language in November. Although EVE Online is a nonmainstream SF MMORPG which has already been in service for more than 10 years, we had more users than expected, which brought overall growth to EVE revenues. This became an opportunity for us to reaffirm our belief that well-made MMORPG games can show performance that can go beyond any era or any region. In addition, to extend the lifestyle of games being serviced, we strengthened stable game operations and user communication. Through consistent updates each week, we resolved user complaints, improved gaming experience, and through large-scale updates, including the Great Ocean and the Great Desert, we worked hard to provide new experiences and adventure to users. In particular, in 2019, we wanted to get closer to our users and attempted diverse methods of communication. We provided online activities, including providing game notes and real-time communication with our developers, and also launched our own official grading service, including Black Desert TV and [indiscernible]. We are continuing offline activities where we can directly meet our users around the world. In addition, we developed new titles and took on diverse technical challenges to secure future growth drivers. In November, we presented the new titles that we have been developing at G-STAR. In particular, Shadow Arena, which will be launched in the shortest time, is reflecting feedback through many CBTs, and we are working hard to get positive results. We also continued investment to enhance the level of our company's strength, which is technical capability. We are developing so that all platform support is possible and we will be in step with [ related ] technology such as cross-platform, game streaming and next-generation devices, and also make preparations so that superior graphics and fast development speed can be maintained. With the stable sales of Black Desert and EVE, which have been globally -- which have become globally strong IP, and with the results from diverse platforms, we posted operating revenue of KRW 538.9 billion, a 33% growth Y-o-Y. However, our operating profit has posted KRW 153.8 billion, a 8.5% drop Y-o-Y, due to increase in labor cost to develop our new titles. Next, I would like to cover our company's Q4 financial results. This quarter's operating revenue posted KRW 119.6 billion, a 11.0% decline Q-o-Q. Operating profit posted KRW 39.1 billion, a 1.0% decrease Q-o-Q and net profit posted KRW 49.6 billion, a 13.2% increase Q-o-Q. The operating profit ratio and net profit ratio each posted 33% and 42%, respectively. In this quarter's operating revenue, we have a temporary effect due to the console recognition that the change of the operating revenue. We changed the method of console operating revenue recognition from the previous method of recognizing our operating revenue and cost from a total revenue system to a net revenue recognition method in our console business to follow global examples and to apply a conservative accounting method. Accordingly, we had a one-off or temporary difference in our revenue and operating costs. However, if we had applied the same accounting standard, this quarter's operating revenues is estimated to post KRW 130 billion. I would like to explain in more detail about our operating revenues. I will first explain about operating revenues for each IP. The operating revenue from Black Desert posted KRW 102 billion, a 14.9% drop Q-o-Q. This was mostly affected by the change in the console revenue recognition method that I aforementioned. If we apply the same accounting standard, the operating revenue from Black Desert IP will have posted KRW 112.4 billion, a 6.2% drop Q-o-Q. In the case of EVE IP, with the revenue growth on the back of EVE Online Korean language launch and recent updates, operating revenue posted KRW 15.6 billion, a 6.8% increase Q-on-Q. The other KRW 2 billion of operating revenue was posted for subsidiaries like [indiscernible] and Pearl Abyss Capital. In the case of regional operational revenue, in Q4, with the console high season and the increase in North America and European regional sales following the global launch of Black Desert Mobile, the regional revenue of North America and European region was 33%, a 4 percentage point increase Q-o-Q. The domestic contribution was 26% for Korea and the Asian region revenue contribution was 41%, both showing a 2% drop Q-o-Q. 74% of our company's operating revenues is taking place in overseas. Next, I would like to explain about the operating revenue for different platforms. 36% of Q4 operational revenues occurred on the PC platform. 55% took place on mobile phones. Console revenues dropped at 9%, but it was caused by the differences in the revenue recognition accounting standard change. In terms of the user settlement account, Q4 console sales is about 17% and the ratio is continuing to increase. Next, I would like to cover operating expenses. Q4 operating expenses posted KRW 80.5 billion, a 15.2% decline Q-o-Q. In the case of labor costs, along with the increase of headcounts, temporary costs increased, including accounting expenses for [ closing ], and posted KRW 31.6 billion, a 18.5% increase Q-o-Q. The ratio of labor cost is 26.4% of revenue. For your reference, the numbers of employees are: 1,232 headcount, a 81 headcount increase Q-o-Q, and the numbers of employees in development are 772, making them 62.7% of the total employees. In the case of commissions, it posted KRW 18 billion, a 56% drop Q-o-Q. This was caused mainly by the adjustment in the commissions related to console since we changed the console revenue recognition method from total amount to net amount or net revenue, as was explained previously. In addition, there is lower contribution from mobile revenue, and we are decreasing commissions by having cost efficiency through changing from an existing cloud method to operating the IDC directly for server utilization in the regions that are maintaining a stable service trend. The ratio of commissions compared to our revenues is 15.1%. In the case of advertising, due to marketing execution considering profitability, despite the global marketing campaign for Black Desert Mobile and our cost participating in G-STAR, we posted KRW 16.8 billion, just a 5.8% slight increase Q-o-Q. Lastly, I will cover 2020 major highlights. We have grown vastly while developing our Black Desert IP and while providing service. Despite this, there are many external and internal challenges for us to overcome in 2020. First, we are making preparations in our technology and in our business to be well adjusted to the changing environment. Technology-wise, with development in hardware technology, including game streaming, next-generation device and cross-platform, many requests are being voiced by our users who are enjoying our games. We will continue to develop our technology to keep in step of these requests, so that we can service the highest quality games in any situation. We will improve our service quality and strengthen profitability. Based on our 2 strong IPs, Black Desert and EVE, we will [indiscernible] diverse content so that users can enjoy them for a long time, and we will revise and renew existing content so that users can enjoy it in a more enjoyable and better way. In addition, we will hold diverse user events and receive more feedback for both IPs and create games that users can make together with us. In addition, we will thoroughly analyze our costs for the existing services, so that our profitability can be more strengthened. Last but not least, we are doing our best to develop new projects and thoroughly prepare for future service. First, in the case of Shadow Arena, which is an action battle royale genre game, we have been verifying and improving the gaming experience through 2 tests until now. As a result of the tests, we could find out that users were very positive and accepting other features that were different from existing battle royale games, like the [ melee war ]. In particular, in the second test, encouraging results such as average play time and retention rate increase continuously show during the [indiscernible]. We are planning global test through Steam at the end of February. Along with adding our new build, we plan to have the test divided into different areas of Asia, Russia, North America and Europe. We will also provide continuous information regarding 3 new titles that we are developing at the appropriate timing. Going forward, everyone here from our CEO to the employees are all doing our best. We look forward to your support and interest. Thank you. With this, we will conclude Pearl Abyss 2019 Q4 business results presentation and start the Q&A session.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be given by Eric Cha from Goldman Sachs.

[Interpreted] I have 2 questions. The first question is about the current status of Black Desert Mobile and the regional revenue breakdown and the trends. When we see the ranking in Korea and Japan, it seems that they're a little bit lagging. So could you tell us why you think this is happening? And how are you going to -- do you have any strategies to recover the revenues? My second question is about the accounting adjustments that you aforementioned. And it seems that the commissions have declined greatly. It seems actually to me that the adjustment in revenues is overshadowed by the adjustment in commissions. And you mentioned that after those adjustments are made, excluding them, then the operating revenue would be about KRW 130 billion. But then I would like to know, after adjusting for those accounting changes, what would be your operating profit?

[Interpreted] I would like to answer your first question. Let me give you the breakdown of the different regions and give you some information about the current status of Black Desert Mobile. In the case of Korea, despite the fact that the user indicators have been very consistent, our revenues were actually weaker than in the previous quarter. When we look at the different months, it seems that we were affected by our competitor's titles, MMORPGs, and their very aggressive premarketing and showed the weakest point in October. However, after those games have been launched, we saw a rebound in our user indicators and in the revenues. In particular, after the update of our Desert -- in December, then you can see that we have received very positive reviews that we have actually strengthened the essence of a game of MMO and our DAU and our returning users drastically increased. Because now we are very much maintaining our stable user indicators, we will work hard for us to actually maintain these revenues at a consistent level. In February of this year, we will celebrate the 2 year anniversary of our Korean service and we plan to have large-scale updates that will make the game experience more strengthened as a MMO game. Going forward, we also actually saw very positive results during our first anniversary event. So we believe that along with these consistent updates, we will communicate more actively with our users, including having offline user meetings and having our own grading content, so that we can expect a revenue rebound. In the Japanese market, despite our genre limitation as an MMORPG, Black Desert Mobile was launched in Japan and has received great reviews. Similar to general mobile game revenue pattern, after the launch, we actually peaked at the highest revenue and then we had a slow gradual downward revenue process, which was very gradual. We also were able to confirm once again the challenges that we need to overcome. We are trying to actually cut down on our revenue fluctuation because we have too much concentration of our revenues only at the update, and we want to maintain a consistent revenues per daily users. So we are working very hard to improve our shop and our products. Japan will soon celebrate 1-year anniversary of Black Desert Mobile service. In 2020, based on the last year of service experience and lessons learned, we will make up for our vulnerabilities and meet our users with diverse content. Through this, we will not only expect a rebound in our revenues, but also offer stabler long term service.

[Interpreted] I would like to answer your question about the console. As was explained, we changed our console revenue recognition method from the previous method, which it was on a total amount basis where it was for all the revenues that were incurred, to a method where we just recognized the net amount from the total revenue. As was aforementioned, now we have changed to a net revenue recognition amount, where we just recognize the amount that is settled from our platform company to our -- as our amount. So the standard of the recognition between the total revenue and the net revenue actually is analyzed based on the contractual forms and the real economic relationships. And accordingly, in the past, we actually recognized this on a total revenue basis, similar to our online games. But from this quarter, we are keeping in step with the global companies that provide console service and we are actually keeping in step with the accounting standards that they use, so that we can have better comparability and so that we can actually cut down on our financial risk. So we have changed to a net revenue recognition method. Because now we are recognizing our console revenues on a net basis, the related market commissions amounts are excluded from our commissions, so we do not have any revenue referral as well. So it means that there is no impact to our operating profit because this affects both our operating revenue and operating costs. However, in the short term, we just have a difference because we have the accounting deferral effect that doesn't occur because of the change. And we believe that if we use the same method, then our operating costs would be about KRW 90 billion, and operating profit would be about KRW 35.1 billion.

[Interpreted] Thank you very much. It was our COO, Heo Jin Young, and CFO, Cho Seok Woo, who answered your questions. We will take the next question.

[Interpreted] The following question is by Oh Dong Hwan from Samsung Securities.

[Interpreted] I just have a follow-up question to the accounting adjustment that was aforementioned. Now can we understand this to be that in the previous quarter, you had recognized the cost for console, but they were not actually linked to this quarters. So it means that on a cost basis, there was just a one-off for this quarter? And could you also brief us on the schedule of your major titles that you plan to launch? And for Shadow Arena, does that mean that after the tests are concluded in February, you're going to launch in Q2 of this year? And if possible, I would like to know about the future schedule for Crimson Desert and Echoes as well if possible.

[Interpreted] I would first like to answer your question about the commissions related to console. So if we had -- it is true that, as you mentioned, the cost related to consoles were settled for this quarter. So if that did not happen, then the commission would be KRW 37 billion, which is 29% of the previous quarter.

I would like to answer your second question about our new title schedules. For Shadow Arena, which has -- we're just planning to have the closed Beta service that will be concluded for the third round at the end of February, we plan to have the service in the first half of this year. For EVE: Echoes, which is now being -- which is getting ready by CCP Games and NetEase, well, it will not be us, but we believe NetEase, who will -- will give you the information about the launching schedule when it's ready for EVE: Echoes. At G-STAR in November of last year, we also disclosed and showcased some of the information related to Crimson Desert and DokeV. As was made public previously for Crimson Desert and DokeV, we are planning to test them from this year. Following G-STAR of last year and at E3 in June of this year, our goal is to disclose more information. So we are doing our best to develop those games further. Because according to the development situation, the launching schedules can change, so we ask for your kind understanding that we cannot give you the exact date at this time for the future launching.

[Interpreted] Thank you very much. It was our CFO, Cho Seok Woo, and our CEO, Jung Kyung In, who provided the answers. We will take the next question.

[Interpreted] The following question is by Stanley Yang from JPMorgan.