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 will begin the conference of the Fiscal Year 2020 Second Quarter Earnings resulted (sic) [ results ] by Pearl Abyss. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 second quarter earnings resulted (sic) [ results ] by Pearl Abyss.

Greetings. I am [ Dong 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 2020 Q2 Pearl Abyss earnings presentation despite your busy schedule. 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 material 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 Gyeong-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.

Greetings. I am Pearl Abyss CFO Cho Seok Woo. Once again, thank you for taking part in our company's earnings conference call despite your busy schedule. I would like to elaborate on 2020 Q2 major business activities and results. We have firmly established the 2 strong IPs that we have, Black Desert and EVE Online in many countries and platforms. Through this income flow diversification, we were able to achieve stable results in Q2. Black Desert, even in a situation where it was hard for people to meet due to COVID-19, made efforts to continue user communication activities. In particular, we held the first global online user meeting for the first time for a Korean game company with more than tens of thousands of users participating from all over the world at the meeting, which we was broadcast in 9 languages. We shared our second half road map and had a global online Q&A streaming session. Thanks to our efforts, our global users responded with long play time and Black Desert Online and console showed balanced results in all regions and experienced high growth of operating revenue compared to the previous quarter. In addition, Black Desert Japan transitioned to self publishing in late April. Japan service was the third country to self publish after Russia and Korea. Based on the past experience, we transitioned paying utmost attention to user convenience and had a successful transition, including posting a record high number of concurrent users in 5 years of service. On the other hand, Shadow Arena started Global Early Access on May 21. During the Early Access period, we actively reflected the user opinions, and we are improving gameplay through a changing balance rather than pursuing profitability. EVE Online strengthened guidance for new users and provided content that loyal users could enjoy so that it could appeal to more users, although it's a game that has been in service for more than 17 years. As a result of these efforts, operating revenue went up 31.9% Q-o-Q and proved that a good IP could still grow despite the passage of time. In addition, China service began on April 27. After the launching, our operating revenues are climbing each year since more new users are joining us in different cities. Furthermore, along with the knowledge and know-how of our publisher, NetEase that has a very high understanding of the region, along with CCP's global service experience, and CCP has a very high understanding of the game, we are planning and executing diverse marketing activities to actively attract new users. EVE: Echoes, the mobile version of Eve, will start official service from 5:00 p.m. today Korea Time in all global regions, excluding China. With the nearing of our launch date, users' expectations and excitement has heightened, and the numbers of preregistration has surpassed 5 million. Through countless tests, we have improved the game quality, and we will work hard so that it will become a matchless sci-fi game on the mobile platform and become a game that is long loved as much as Eve online. Next, I would like to cover the company's Q2 financial results. This quarter's operating revenue posted KRW 131.7 billion, a 1.1% decrease Q-o-Q. Operating profit posted KRW 50.6 billion, a 9.5% increase Q-o-Q, and net profit posted KRW 23.6 billion, a 51.1% decrease Q-o-Q. Operating profit ratio and net profit ratio each posted 38.4% and 17.9%, respectively. I would like to explain in more detail about our operating revenue. First, I would like to explain about the operating revenue for different IP. In this quarter, the operating revenue for Black Desert posted KRW 111.5 billion, a 6% drop Q-o-Q. The stable growth of PC and console offset the weak mobile and showed solid revenue flow. In the case of EVE IP, with solid loyal user base and new service in China, KRW 18.9 billion of operating revenues, a 31.9% increase Q-o-Q was recorded. In the case of operating revenue for different regions, with the revenue increase of Black Desert, PC and console in the western region and growth of EVE Online, North America revenue grew 12.6%, and took up 48% of the overall operating revenue and grew 6% Q-o-Q. The revenue contribution of Korea and Asia was 22% and 30%, respectively. Next is operating revenue for different platforms. In Q2, operating revenue, 44% was from PC platform, 43% was for mobile and 13% was for console. Thanks to the continued operating revenue growth of PC and console platform, the size is gradually growing. Next, I would like to cover operating expenses. Q2 operating expenses posted KRW 81.1 billion, a 6.7% decrease Q-o-Q. In the case of labor costs, it posted KRW 30.9 billion, a 3.6% drop Q-o-Q. With the impact of COVID-19, new hiring was delayed and the total headcount dropped. For your reference, the numbers of employees as of end Q2 are 1,003 (sic) [ 1,203 ] headcount, a 43-headcount decrease Q-o-Q, and the numbers of employees in development are 711, 59% of the total employees. In the case of commissions, it posted KRW 29.3 billion, a 10.6% decrease Q-o-Q. With efforts to save server/line costs and decreased market fees, the commissions rate went down. In the case of advertising expenses, it posted KRW 9.2 billion, a 2.9% decrease Y-o-Y through efficient marketing. We will consider the maturity stage in each platform and region and find the most profitable marketing method. Lastly, I will cover Q3 major highlights. Based on stable profitability through strengthening IP values, we will expand our new pipeline. In Q3, we will continue to make efforts to strengthen the Black Desert IP. In particular, this quarter was the first attempt to have the simultaneous or concurrent updates to each platform, including PC, mobile and console. And through closing the content gap for different platforms, we plan to heighten interest in each platform. At the start in early July, we simultaneously updated Hashashin class to all platforms and received great response from users. This was a possible update since we serviced 3 platforms simultaneously for 1.5 years and improved understanding about each platform and advanced the development process beforehand. Accordingly, through securing the skills and experience to offer content in different platforms, sometimes simultaneously and sometimes consecutively, we now have more choices to offer when we provide services going forward. In addition, we will offer more entertaining content to strengthen user loyalty. Season Server, which was warmly received after the first beginning in March, and the second version, Summer Season has started. Befitting its status as a globally service game, we had a country match between Southeast Asian countries and Thailand. In addition, we had a collaboration with the global IP Cursed and offered diverse rich entertainment, and we will expand the existing users as well as new user base. In addition, we are strengthening user feedback channels. We are coming up with many ways to receive feedback, including inviting users to our company, holding FGTs and directly communicating with developers on site. Through this, we will make a game that will continuously meet the taste and preference of our users. In addition, in the case of Shadow Arena, we will continuously attract user participatory activities rather than just engage in large-scale marketing during the early access period so that we can have perfected gameplay and expand the user base simultaneously. In Q3, we are also planning to have a game tournament with the support of an external party. EVE IP will also continue to work to expand profitability through a more solid user base and revenues. Based on strengthened live service of Black Desert and EVE IP, we will maintain our stable financial performance and work hard to secure new pipelines. EVE: Echoes will be officially launched at 5:00 p.m. Korean Time today, everywhere in the world, excluding China. EVE: Echoes, which will be simultaneously provided in 7 languages based on UI-UX optimized for the mobile environment, will offer rich content using EVE Online resources and provide unique content that could only be found in EVE: Echoes so that users could be entertained and feel fresh amusement. Along with this, we will continue to develop new IP. We are accelerating speed in developing our new titles, and we will thoroughly make preparations so that it could be disclosed to the public as soon as possible. In the second half of the year, we are preparing to additionally disclose Crimson Desert. Since we know many people are excited about the game, we are working hard to make a game that will stand out even in the global market. We are reviewing the most appropriate timing and method to disclose the game to the public, and we will let you know when it is decided. Going forward, everyone here at Pearl Abyss, from our CEO to all the employees are all doing their best. We look forward to your support and interest. Thank you. With this, we will conclude Pearl Abyss 2020 Q2 business results presentation and start our Q&A session.

[Operator Instructions] The first question will be given by Eric Cha from Goldman Sachs.

My first question is about your guidance that you gave at the previous conference call -- earnings call regarding the disclosure and the launching of Crimson Desert, and you mentioned Q4 of next year. So does that still hold? And you also mentioned that in the latter half of this year, you are going to disclose more information about Crimson Desert. Can you be more specific? For example, can you tell us about at which timing you are going to disclose the game to us? For example, have any boom-up events or have any marketing promotional activities?

As we had mentioned in the previous earnings call, our target is the latter half of next year, and we are concentrating on developing the game for us to have additional disclosure of Crimson Desert. We cannot tell you about the specific timing. However, considering the marketing effect, we are picking up many different methods, including having joint disclosure of the games with an external partner. When our method of disclosing the game and the schedule is confirmed, we will communicate this to the market.

It was our CEO, Jung Kyung In, who answered the question.

The following question is by Stanley Yang from JPMorgan.

I actually have 3 questions. First is about EVE: Echoes, and how is this differentiated from EVE Online? For example, are there differences in the gameplay or others? If you could answer that question, it will be greatly appreciated. And to my knowledge, NetEase developed this game. So to my understanding, the royalty fees are lower than your own development gains. So do you have any plans to have your own development going forward? Next question is about the Black Desert IP. We know that you have successfully expanded the IP, including mobile and console, but mobile seems to be weakening. Can you tell us about any plans going forward to maintain or grow the operating revenue of the overall Black Desert franchise? And last question, when do you plan to have this launched in China, if you have planned?

Thank you for your questions. Regarding your first question about EVE: Echoes, well, when we think about the gameplay of EVE: Echoes and EVE Online, for EVE Online, actually because it has many core players and because the barrier to play the game is a little bit high, it is different from our EVE: Echoes that has been -- that is going to be newly launched because EVE: Echoes is using a mobile platform, so the entry barrier is lower than EVE Online. So that is why -- one of the reasons we intended and made this game. And regarding your comment about NetEase, yes, it is true that NetEase developed EVE: Echoes. And currently, we are working very hard with CCP so that we can have good results with the game. And although we do have potential going forward using this IP to make mobile projects, we don't have this in our current plan as of now.

Thank you for your question about the Black Desert IP. And we are working hard to maintain and utilize our Black Desert IP. And it is true that 5 years has passed since we launched the PC version, and we are trying to have stable user bases, and we have actually expanded this to many platforms. And we have many, for example, different methods of platform expansion, including Steam and other service regions, and we are seeing very good growth. So we are reviewing Steam possibilities in other areas as well. For mobile, it is true that 2 years and 6 months have passed. So we have some possibilities of trying to shorten the gap between our most users and our new and returned users. So we are working hard so that we can close this gap and to have a stronger basis, so that we can have stabilization of Black Desert IP. Also in order to increase the brand value of Black Desert IP, we are working with many partners, and we have many collaborations. Also, you can understand that Shadow Arena, actually, that we are currently servicing, is a new attempt to utilize our Black Desert IP. And although we do have concrete plans as of now, we are discussing many possibilities of utilizing our Black Desert IP in different games going forward. Thank you very much for your question about the Chinese [Foreign Language] or license. Actually, we don't have a concrete knowledge about when this will be possible going forward, but we are working very hard with the publisher to be totally ready when we do get the license. However, we believe that we need to keep a very keen eye on the situation so that we can know about the atmosphere.

Thank you very much. It was our CEO Kyung Jung; and COO, Heo Jin Young.

The following question is by Kim Jingu from KTB Investment Securities.

I have 2 questions. First question is about Black Desert. I saw that your revenues for Black Desert in this quarter for both PC and console were very solid and growing. So do you have any other strategies to actually have this repeated in other quarters as well? And can you tell us about the current status, if you are seeing more growth in the current quarter as well? My second question is about EVE: Echoes. I know that you mentioned that it is going to be officially launched today. And can you tell us about any strategies you have going forward, including marketing or any strategies to attract users and to maintain revenues? And can you tell us about any expectations you have about the numbers of future users and comparing this to the PC version?

Thank you very much for your questions. And regarding the current Q2 console and PC revenues for Black Desert, let me elaborate. You can see that our revenues for Black Desert actually showed very balanced growth in all regions and grew 22% Q-o-Q. In Q2, we have actually commemorated our first anniversary of self publishing in Korea, and we held the first-ever online global user meeting as a Korean game company. And despite COVID-19, we worked very hard to communicate with our users. Accordingly, our user indicators improved. And in Q2, Black Desert could grow as well. In the case of Japan, we had transitioned to self publishing, and we had our music video production with the Japanese rock band play, and we actually garnered a lot of attention from users through this type of unique marketing. We had expanded user participatory content and events and succeeded in attracting more new and return users. The user satisfaction following self-publishing was very high. And along with the increase of user numbers, we had very good performance, including more than a twofold increase in our revenues. In the case of revenues for North America and Europe, along with the growth of Steam, Russia and the Turkey region, it grew 11% Q-on-Q and continued very solid performance. Currently, in Black Desert Online, Steam contribution is 15% and Q-o-Q, the Steam revenues have increased 11%. In particular, with the promotions we held in March, we had more than a 10-fold increase in our new users and the high retention of the heightened numbers of new users led to very good and solid financials in Q2. So Black Desert PC in Q3, considering our very active user indicators and COVID-19 situation, is expected to have a very positive revenue flow. We will work hard so that we can have solid performance in all regions. In the case of Black Desert console in Q2, you can see that our Q-on-Q revenues grew by 12% and maintained the growth pace. After we adopted Cross-Play in March, the numbers of users grew and these users were stably maintained all during Q2 and contributed to very positive performance. We also believe that it is very meaningful that the numbers of new package sales are increasing even though Black Desert console has been launched for more than a year. We believe that even in the latter half of this year, Console is going to maintain a very positive revenue flow. We have a very strong and solid numbers of our existing users. And we have the new users that have joined us from Q2. We also have many events and promotions. And when we consider the users that have responded very warmly to these events and promotions, we expect very encouraging financial results. Along with this, at the end of the year, there's going to be launching of high-performance new console devices, and we believe that these will contribute for the long-term service of high-quality Black Desert.

For EVE: Echoes, NetEase that has been the game developer and the servicer as well as CCP Games that has been the IP owner, have been collaborating very actively for us to develop EVE: Echoes. And we plan to have the official opening at 5:00 p.m. Korean Time, and we have more than 5 million pre-registrants. So we will share with you the results after we have the opening of the game. We believe that we already have a very strong e-fan base. And based on the new playing experience provided with our mobile game, we can have a very good experience for our users going forward.

It was our COO Heo Jin Young; and CEO Jung Kyung In that answered their questions.

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

I actually have 2 questions. The first question is about Black Desert PC. And we can see that your revenues grew after your transition to self publishing. Can you tell us about your growth in the first half of this year compared to the previous year based on a settlement amount basis? And can you also tell us about the different regional operating profit increase after you transitioned to stop publishing? My second question is about a seeming gap between last year's Q2 performance and financials in revenues and operating profit. So can you tell us because it seems like there is a slight difference in the numbers?

I will answer the question based on the settlement amount and the deference amount. When we see the revenue deferral effect, it happens when it goes into self-publishing. So actually, in almost all the countries where we have the transition, the deference amount could cover the settlement amount. That is why you can see that the increase in the settlement amount and the amount of the revenues is similar. To answer your second question, in Q4 of last year, we had a change in the recognition of console revenues from a total amount basis to a net amount basis. That is why regarding all the financials that you are seeing, regarding all our revenues and all our sales and profit, you can see these are all now based on a net amount basis and not on a total amount basis that we used in the past.

It was our CFO Cho Seok Woo, who answered the question. Because of time constraints, we can take only 1 more question.

The following question is by Kim Taewon from UBS Securities.

I have 2 questions. The first question is about any update you can give us for Shadow Arena because you mentioned the possibility of e-sports. So going forward, can you tell us about any feedback you have received regarding that possibility and the numbers of your users? The second question is about the 1-year gap it seems that you will have after launching EVE: Echoes and before you launch Crimson Desert. So is there any specific numbers or -- that you have in mind for the growth of your development team or any targets going forward? And do you plan to just tap the encouragement of your revenues of your existing game during that 1-year period?

Thank you very much for your questions. And for Shadow Arena, we started Early Access through Steam on May 21. Early Access is getting feedback from our global users before the official launch so that we can improve the content. We are analyzing the user behavior, and we are revising the game each week. Also, we are holding many matches so that it can develop as e-sports and heightening our user participation. Going forward, we are going to find the right direction for the game and to have different user participatory marketing activities.

Let me answer your second question. You mentioned our headcount in our development team. And going forward, talking about the numbers of our employees, we believe that we had more or less right number of hirings for the development of our new titles. And although it might be a little different after we have our new title games going live, we believe the current numbers in our development teams are appropriate. So we believe that there won't be a big increase in the numbers of the game teams or game team members going forward. And of course, we are having our game development teams for our new titles focusing their efforts on the development of our new titles and for the game development teams for live service, they are concentrating their efforts on the Black Desert and EVE: Echoes as well as other EVE IP products.

It was our [ Kim Gyeong-man ]; and CEO Kyung Jung In, who answered your questions. We will conclude the Q2 2020 earnings release for Pearl Abyss. Thank you very much for your participation.

This concludes the fiscal year 2020 second quarter earnings resulted (sic) [ results ] by Pearl Abyss. Thanks for the participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]