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

[Foreign Language] Greetings. I am [ Jong Jin Gyu ], Head of the Finance One 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 Q3 Pearl Abyss Earnings Presentation despite your busy schedules. [Foreign Language] Before elaborating on today's business results, I would like to ask you 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. [Foreign Language] We have here with us in the earnings presentation today, Pearl Abyss CEO, Jung Kyung-In; COO, Heo Jin Young; CBO, [ Kim Jung Man ]; 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.

[Foreign Language] Greetings. I'm Pearl Abyss CFO, Cho Seok Woo. Once again, thank you for taking part in our company's earnings conference despite your busy schedule. [Foreign Language] I would like to cover the 2020 Q3 major business activities and highlights. We have been securing a solid user base through stable service and have been enhancing the IP profitability of Black Desert and EVE. Black Desert has been expanding user base through supplying continuous content. In particular, we have updated Hashashin Class in July in all platforms, including PC, mobile and console, and we have done it all simultaneously. This was an experience to close the gap between platform users, enhance the IP value, and at the same time, continue to have continuous competitive advantage in the game platform that are getting more and more diverse. In the case of online globally in all areas, the numbers of users grew, and the user bases became more solid. In September, the numbers of users was the highest in the same period during the last 3 years. Sales also grew 11% and posted the highest amount of sales during Q3 during the past 3 years as well. In addition, in the Japanese online popular game ranking, we ranked #1, and our performance was strong after self-publishing in Q2. For console, the numbers of users have increased globally in all regions. In the traditional low season of Q3, many new users have been joining us, and we are preparing a basis for long-term service. In particular, as we accumulate many experiences in the console area, we are preparing to become a globally competitive console game developer in the global market. In mobile, the numbers of global average and returning and new users have increased about 200%, and we have strengthened our fundamentals for long-term service. In addition, and by the world's biggest mobile game journal, Pocket Gamer, we have been ranking #12 among the 2020 global top 50 mobile developers and ranked the highest out of all Korean developers. We are standing shoulder to shoulder with global studios such as Activision Blizzard, ranked #9; and Epic Games, ranked #11. If online has grown for 3 consecutive quarters with the growth of core users and Chinese sales growth, the core users with high loyalty and high spending have grown more than 30% compared to early in the year, providing stable growth. In addition, if online China was launched in April and expanded the user base with an increase of new users and our stable results are continuing. In the case of EVE: Echoes, there is good performance after launching in August 13. EVE: Echoes recorded #1 in major countries' charts when first launched, including in the U.S., Canada and France, and received a great amount of attention. Although we didn't have high sales in the short term due to the characteristics of the game, we have created a sufficient basis for long-term services. [Foreign Language] I would like to cover the Q3 financial performance. This quarter's operating revenue posted KRW 118.3 billion, a 10.2% drop Q-o-Q. Operating profit posted KRW 40.5 billion, a 20.0% drop Q-o-Q, and net income posted KRW 27.8 billion, a 17.8% increase Q-o-Q. Operating profit ratio and net profit ratio each posted 34.2% and 23%, respectively. [Foreign Language] I would like to explain about operating revenue in more detail, and I will cover the operating revenue for different IPs. The operating revenue from Black Desert IP in the quarter posted KRW 96.2 billion and decreased 13.7% Q-o-Q. With the seasonal low demand effect, PC and console sales were lower. In the case of EVE IP, with the increase of loyal users and on the back of Chinese service and launch of EVE: Echoes, KRW 21.3 billion of operating revenue was posted, a 12.7% growth Q-o-Q. In the case of operating revenue for region, on the back of Black Desert Online Korean solid sales and Black Desert Mobile sales recovery in Korea, Korea contributed to 23% and increased by 1% point Q-o-Q. Asia's operating revenue contributed to 32% and with higher sales in Black Desert Japan, and EVE China rose 2% point as well. On the other hand, North America/European region contribution was 45%. And due to the partial decrease of PC and console, sales dropped 3% -- 3 percentage points. Next, I would like to cover the operating revenue by platform. You can see that in Q3, we had a 46% contribution by the PC platform, 44% in mobile and 10% on the console. Black Desert operating revenue rose in Korea and Japan. And with the expansion of EVE operating revenue, PC contribution rose 2 percentage points, and consoles that had a high contribution in areas including North America and Europe dropped by 3 percentage points. [Foreign Language] Next, I would like to cover operating expenses. Operating expenses in Q3 posted KRW 77.8 billion, a 4.1% drop Q-o-Q. In the case of labor costs, it posted KRW 30.6 billion. You can see a slight [ quarter ] difference of 0.9% Q-o-Q. We are improving our work process, making the structure more efficient, and have been conservatively hiring. So there wasn't a big difference in the labor costs. For your reference, at the end of the third quarter, the total headcount was 1,195, 8 people less than the previous quarter, and we have 709 developers, which is 59% of the total headcount. In the case of commissions, it posted KRW 25.3 billion, a 13.6% drop Q-o-Q. In particular, we are working hard to decrease commissions by establishing IDCs to cut down on server and line costs and have been price negotiating with cloud providers and making many efforts to reduce our commission costs. In the case of advertising expenses, we have now established a very efficient marketing system, and KRW 9.2 billion, similar to the previous year, has been posted. We will work hard to continue efficient marketing in the future as well. [Foreign Language] Lastly, I will describe the major highlights of Q4. Through the consistent live service of Black Desert and EVE, we will work hard to expand revenues and profitability. In Q4, Black Desert, in the high season, we'll give various updates at events to induce user participation. First of all, in December, we will hold the online Calpheon Banquet, which was successfully held in the first half. In particular, this event will have the user participation from all platforms, and we will have an opportunity to hear the 2021 first half major updates and opinion from users and have an opportunity for dialogue and communication. For the Black Desert console, with the launching of the next-generation console, we will offer compatible services so that you can cross-play with your existing data on the new device. In addition, in order to expand new users and expand market share of console market, we launched a retail package on November 6. Black Desert Mobile is planning a winter full-scale update that will be applied to all countries. We will continuously narrow the contents gap in different regions, and we are working hard seamlessly to have simultaneous updates of new content and to give a sense of freshness to our users. In addition, in the global region, with the first anniversary of service, we are preparing for a large-scale update, including the Great Desert. We believe that mobile service can also rebound with this. Shadow Arena has actively reflected the user feedback, and we are actively reflecting user feedback, and Trio mode in the season is a part of that. We are executing continuously game play improvement and balance improvement as well. We will do our best to show you more a complete game going forward. EVE IP, through the launching of EVE Online and EVE: Echoes in Japan, is once again preparing to expand regions. In addition, based on more users, we will provide more strength in community service and work hard to provide higher revenues and have profit expansion on all platforms, including PC and mobile. Most of all, as was promised many times, we will disclose the details of Crimson Desert in December. You will find out more details about the game through in-game play video, including game quality and development stage. In addition, after our disclosure at a showcase before the service, we will continuously give you game-related information and thoroughly prepare for the success of the game. We are preparing for other titles, like DokeV and PLAN 8, vigorously as well, and they are also being developed with no changes to our previous schedule. Based on the stable results of Black Desert and EVE, we will do our best to introduce new titles with high quality to you as quickly as possible. We, at Pearl Abyss, from our CEO to all our employees, are doing our best, and we ask you for your continued interest and support. Thank you very much. With this, we will conclude Pearl Abyss 2020 Q3 Earnings Presentation and start the Q&A session.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be given by Stanley Yang from JPMorgan.

[Foreign Language] I have several questions. First of all, I'm curious about the Crimson Desert event that you mentioned. You've mentioned that you will disclose more information about the game in December. So can you tell us about what kind of events you'll have and what kind of marketing strategy you're going to execute after that? And I know it's a little bit early, but I would also like to know what is your expected revenues from the Crimson Desert IP? Maybe you can compare it to the Black Desert IP and see a breakdown in PC, console and mobile because I think for Black Desert IP, you have currently about KRW 450 billion in sales per year for PC, console and mobile. So do you believe that Crimson Desert has the potential to have similar revenues going forward? And if so, can you tell us the reason? And I know that your console launching has been delayed. So do you think you can launch it by a certain period? Can you tell us about when you think it will be launched? And lastly, are you going to have self-publishing in your Black Desert PC game in North America? And if so, can you tell us about the details?

[Foreign Language] Thank you very much for your questions. Well, I would like to answer your questions about how we're going to disclose Crimson Desert and the comparison with Black Desert and why we had the delay in the launching. So first of all, as we mentioned, we are going to give you more information about Crimson Desert in December and regarding the concrete detail about the venue, about how we're gonna disclose this information and gain to you. We already have them confirmed, but we will give you more details as we have the date nearing by. [Foreign Language] And regarding what we believe will be the revenues for Crimson Desert going forward, well, we are very confident that Crimson Desert will be successful. And although it is hard to give a one-on-one comparison between Crimson Desert and Black Desert, for Black Desert, we see very high performance in many regions around the world. But it is also true that since it is a PC MMO [ game ] that is very popular in Korea and some Asian region countries, we some limitations in growing this game in the western world. [Foreign Language] And for Crimson Desert, we have targeted this game from the beginning for the console market. So because this is being developed with very high quality and high area of perfection, we believe that it will have actually bigger results compared to Black Desert. We also have a great amount of accumulated know-how from Black Desert IP, so we are taking advantage of all of that. And because this is being developed with very high-quality developers and based on our next-generation engine, we can guarantee very high quality. In addition, we have a very strong and immersive storyline. And that is why we believe that going forward, it has all the success factors. In regards to your question asking about possibilities of delayed launching, among our 200 developers that are developing new titles, more than half of them are actually just focusing on the development of Crimson Desert. So that is why we have no changes to the fourth quarter of 2021, which is slated to become our launching period. For the details regarding our launching date, we will give you more information after our plan is executed.

[Foreign Language] Thank you very much for your questions. And regarding your question about possibilities of self-publishing in the North America/European region, it is true that we are receiving a lot of questions about this because we will have the ending of our contract. And although we cannot give you many details because of confidentiality of contractual relationship, we can tell you that North America and European market is the region where we have the highest revenues in sales in PC and console platform. So it is the most important market for us. [Foreign Language] In addition, because our future titles are also targeting console as a major platform, it is very important for us to have more experience in the publishing world in the western countries as well. [Foreign Language] We have been providing our self-publishing service around the world from 2017. [Foreign Language] For 2018, we have had the change of our Black Desert PC service to self-publishing in Korea, Russia and Japan, and we have had very high-quality live service leading to higher users and having improvement in our financial performance as well. [Foreign Language] That is why we're going to consider what will be most beneficial to our company and to our users and decide on the possibility of self-publishing going forward. [Foreign Language] I would like to answer your question about the financial effects of self-publishing. [Foreign Language] As you know, Black Desert Korea and Japan had actually changed to self-publishing in May of last year and April of this year, respectively. [Foreign Language] And it could have some differences in different quarters. But after self-publishing the operating revenue for the respective regions, well, we had the simultaneous reflection of recognition of total revenues and increase of users at the same time. So it grows from about 2 to 3x. [Foreign Language] We believe that if we have -- transfer to self-publishing going forward, there will be similar financial effects.

[Foreign Language] It was our CEO, Jung Kyung-In; COO, Heo Jin Young; and CFO, Cho Seok Woo, who answered your questions.

[Foreign Language] The following question is by Eric Cha from Goldman Sachs.