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

[Foreign Language] 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 2020 fourth quarter earning results by Pearl Abyss. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 fourth quarter on results by Pearl Abyss.

[Interpreted] Greetings. I am [ Jong Jin Gyu ], Pearl Abyss team leader. First of all, I express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2020 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 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, Pearl Abyss CEO, Jung Kyung-In; COO, Heo Jin Young; CBO, [ Kim Kyung-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.

[Interpreted] Greetings, I am Pearl Abyss CFO, Cho Seok Woo. Thank you again for taking part in our company's earnings conference call despite your busy schedules. I would like to cover the 2020 annual major business highlights and performance. Our company, based on superior technical capability, has developed games on all platforms, provided live service and proved our company's capability to the world. 2020 was the first year when Black Desert attempted to provide simultaneous updates to all platforms around the world and not consecutively to different platforms and regions. In July, the Hashashin class and in December, NOVA class was updated simultaneously to all platforms, and the user index and sales all increased. In particular, after the NOVA update in December, new and returning users in Black Desert Online both increased more than 100%, and there was near 200% increase in mobile as well. Through the experience of simultaneous updates to all platforms, we strengthened our capability to more greatly utilize the value of our IP and secured greater capability needed not only to currently service our games now but also needed to service games in the future. In addition, for Black Desert console in March, cross-play between PS4 and Xbox One was provided. And in November, we secured compatibility with new devices. And in the console, where not many Korean developers entered, we proved technical capability that did not lag behind world-class top console developers. We also worked hard to strengthen global live service capabilities. In May, for the first time, as a Korean game company, there was online live broadcast of Black Desert user meeting, Heidel Ball; and in December, we had the Calphe:ON user meeting with users from all platforms that service Black Desert. Using 9 languages, we communicated in real time with all users around the world. Even in the COVID-19 situation, we worked very hard to communicate with our players and users. In addition, with unique marketing that provided fun to many users and through collaboration with a famous Japanese artist, we were able to improve brand recognition through fresh and differentiated marketing. Through these efforts, we were able not only to develop games but also develop sufficient capabilities in publishing which services games and operates the game on the global stage. Black Desert Japan in October ranked #1 in Japan's online gamer and proved the capability of Korean games in the Japanese market, which was considered to be the barren land of Korean games. In addition, Black Desert Mobile in November was awarded Best Competitive at the Google Best Game Awards. Black Desert console, with a high number of unit sales and revenues, was awarded the 2020 PS Partner Award for the first time as a Korean MMORPG game. 2020 EVE Online with increase of core users with high loyalty and high frequency buying rates strengthened our sales bases. Not stopping at this, we implemented regional expansion, including Chinese service in April and Japanese localization in December and launched the mobile game that we prepared with NetEase, EVE: Echoes, in August. We implemented EVE regional and platform expansion and heightened the value of our IP. Most of all, we revealed the game that many were very curious about, Crimson Desert, at The Game Awards, the biggest game awards ceremony in North America. The trailer of Crimson Desert, including excellent graphics and diverse and differentiated action, is receiving very high interest and attention around the world. Since it was picked to be the most anticipated console game by many media and user votes, interest in Crimson Desert is peaking more and more. In the background of why we were able to develop the game independently and show very high quality was our next-generation engine technology. In November, we were the only listed game company out of the 8 Korean companies that were included in the 2020 Boston Consulting Group, BCG, top 100 emerging market tech challengers, proving our technology is being recognized globally. Accordingly, our financial performance is being steadily maintained, and in 2020, our operating revenue posted KRW 488.8 billion, and operating profit posted KRW 157.3 billion. Next, I would like to cover our company's Q4 financial performance. This quarter's operating revenue posted KRW 105.6 billion, a 10.7% decrease Q-o-Q. Operating profit posted KRW 20 billion, a 50.6% decrease Q-o-Q. Net profit posted a loss compared to the previous quarter and posted a minus KRW 500 million Q-o-Q. Operating profit rate posted 18.9%. Due to the characteristic of our company, which has a high percentage of overseas revenues and holding of foreign-denominated currency. Due to the strong won in Q4, revenues comparatively decreased; and in particular, there was about a KRW 20 billion of FX-related losses, which impacted the net profit. I will explain in more detail about our operating revenues. First is operating revenues per IP. The operating revenues from Black Desert IP in this quarter posted KRW 84.4 billion, a 12.3% decrease Q-o-Q. There was the effect from the seasonal off-season effect, which continued until November as well as the weakening impact from FX rates following the strong won. If IP was maintaining stable revenues through recovery of user index but with a strong won, operating revenue posted KRW 19.1 billion, a 10% drop Q-o-Q. In the case of regional operating revenue, Korea posted 23%, the same as the previous quarter. The contribution of Asian operating revenue was 34%. And along with the Japanese revenue increase, there was a 2 percentage point increase. Due to this comparatively, NA/EU contribution was 43%, a 2% point decrease. Next, I will cover the operational revenue for different platforms. From the Q4 operational revenue, 49% was from the PC platform, 40% from mobile and 11% from console. With a stable operational revenue from Black Desert, Black Desert console and EVE online, PC and console contribution each rose 3% and 1 percentage points, respectively, but mobile [ decreased ] 4 percentage points. Next, I would like to cover operational expenses. Q4 operational expenses posted KRW 85.6 billion, a 10% increase Q-o-Q. In the case of labor costs, due to increase of employee numbers and temporary increase of accounting costs for the closing of the year, it posted KRW 32.7 billion, a 7.0% increase Q-o-Q. For your reference, the numbers of employees as of Q4 end is 1,208 headcount, a 13 headcount increase Q-o-Q; and currently, there are 716 developers, which is 59% of the total head count. In the case of commissions cost, with the decrease of market commissions, it posted KRW 24.3 billion, a 3.9% decrease Q-o-Q. In the case of advertising costs, with the event following large-scale updates and increase of year-end marketing costs, it posted KRW 16.1 billion, a 74.9% increase Q-o-Q. Lastly, I would like to cover 2021 major highlights. We will offer more to enjoy in the existing IP that we have and strengthen more capability to provide live service to the world and also focus for the more complete development of Crimson Desert and its successful launch. In the case of Black Desert, we will focus more on the PvP-related development. And in the case of online and console, we will enable users to form a crew by themselves and to add a 10-to-10 crew system where they can compete. We will heighten the fun of Black Desert, and the users can play together and have more fun. In the case of Black Desert Mobile, the biggest PvP balance update since it first started service is soon upcoming. We will adjust the balance between characters and improve the PvP cost simultaneously so that even on mobile, online and console level, PvP can be enjoyed. Most of all, we are expecting to directly service or publish Black Desert in North America and Europe in Q1. Black Desert NA/Europe service, since it first started service in 2016, for 5 years, has been expanding its user base consistently and has been seeing encouraging results in the western world, once considered to be barren lands for Korean MMORPG. 2020 NA/Europe sales increased by about 40% compared to 2019, and considering that it contributes to more than 50% of Black Desert in terms of sales, we expect there to be considerable increase of financials, thanks to self-publishing. In addition, through direct publishing, there will be direct contact and servicing to the users in the Western world. So we will do our best to improve our capabilities to provide simultaneous live service globally. Black Desert in January ranked #4 in Steam sales and is continuously popular in the Western world. And based on the successful transfer or migration to direct publishing know-how in Korea, Russia and Japan, we will thoroughly prepare so that we can have successful migration in NA/Europe. EVE IP after, starting in Korea from 2019, has begun localization service in Japan in December. EVE Online revenues have been focused on the Western world in the past, but we are finding ways to grow in Asia through reflecting the language and culture from different regions. In addition, with the Chinese license for EVE: Echoes that was recently issued, we will provide service through fast preparation. For both EVE Online and EVE: Echoes, we will do our best to consistently expand our user base. Most of all, we will drive development for the disclosing and launching of Crimson Desert. After the Crimson Desert trailer was revealed that included the highest level of graphics, diverse ways of combat and many in-game content, anticipation for Crimson Desert is continuously increasing. Our company, apart from the strong technical capability of Crimson Desert, will work hard to focus on console games where single play is important and concentrate more on the story, setting and scenario so that we can show you a game that befits a AAA game. We will make efforts to increase anticipation until the launching date and engage in continuous marketing, including revealing more trailers that show more content. In addition, we are also preparing for new titles such as DokeV and PLAN 8 on schedule. With the game devices evolving, including next-generation console devices, and a favorable environment, including development of telecommunications, need for high-quality games is increasing. We recognized the trend of this market earlier and have made technical preparation faster than any other. Through a Korean MMORPG game, we have knocked on the door of the console market and tested the market and prepared for cross platform and consumption of fast content and developed a state-of-the-art engine. In 2021, we anticipate that technical investment that we have made so far will reap great achievements in 2021. We will do our best so that we can provide the best live services and launch AAA-level new titles so that the investment and efforts that we have made so far are not wasted. In order to become a better company, all employees from our CEO is doing our best. We will ask for your continued interest and encouragement. Thank you for listening. With this, we will conclude the Pearl Abyss 2020 Q4 earnings release and start the Q&A session.

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

[Interpreted] Thank you very much for the opportunity. I have 2 questions. First is about Black Desert Mobile, and it's been a while since Black Desert Mobile was launched. But we are seeing that the sales are going down compared to the previous year, and it's already the fifth quarter since it was globally launched. So can you tell us about why you think the sales are going down, how you're going to respond? And what is the trend of the sales that you are anticipating? Second question is about Crimson Desert. I know that you received a very good response after revealing your game. So do you have plans? Do you believe that in your current plans to launch this game in Q4, when you see the launching of similar games by some global game developers, I think there is a balance that is needed between the completeness or perfection of the game and the investment plans going forward? So do you believe that, with your current development pace, you will be able to launch the game by Q4? And can you tell us any concerns that may exist if you believe that there are going to be some hitches?

[Interpreted] Thank you for your questions. First, I will tell you about our sales forecast for Black Desert Mobile. In the case of Korea, with the consistent updates of new classes, Sura and NOVA and others, we were able to have an anniversary event for 1,000 days of service, and we work very hard to strengthen communication with our users. In addition, with the update of NOVA in December, we had the increase of new and returning users by 188% and 167%, respectively, compared to the previous months. And even now, we are having a stable continuation of our user bases. However, in the case of Black Desert Mobile, which is based on growing and competing with your character, with the life cycle of the game getting longer, it is true that we are seeing some limitations or challenges because of the growth and competitive factor of the characters. However, in order to overcome these challenges, we have actually added many others to enjoy, including The Great Ocean and The Great Desert. And we have been also improving the PvP content within the game so that our players can enjoy the game continuously. So it actually marks the 3-year anniversary since we launched this game in Korea, and we are going to do our best so that we can overcome the challenges of a MMORPG mobile game and make it more player friendly.

[Interpreted] Thank you very much for your question. I would like to answer your question about the level of completeness of Crimson Desert and about our schedule of the launching going forward. As you have mentioned, we also believe that for Pearl Abyss games to be beloved for a long time by our players, we need to have a level of completeness or perfection of the game that is of a very high level. With also the support and contribution by our Chairman, Kim Dae-Il, all of the best developers of our company are focusing their efforts on the development of Crimson Desert. As we had guided you earlier on, we are going to focus all of our efforts so that we can launch the game within Q4 of 2021. In addition, for details about the launching schedule, we will disclose them according to our future plans.

[Interpreted] It was our COO, Heo Jin Young; and CEO, Jung Kyung-In, who answered your questions.

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

[Interpreted] I have 2 questions as well. For Crimson Desert, we saw that the trailer or the video of the game that you have disclosed to the public. So will there be other trailers or similar types of footage that we can see? Do you believe that you will heighten the players' anticipation for EVE game play at E3 or others? Or can you share with us what will happen in the middle of the development phase before you launch the game? My second question is about the development situation of DokeV and PLAN 8. Are you currently prioritizing the development in Crimson Desert so the development of the 2 games is a little bit belated? Or are you still on schedule with the development of both games?

[Interpreted] I will first answer your question about the Crimson Desert. After The Game Awards, we have seen more interest, heightened interest by all the users around the world and the media. And we are going to do our best for a successful launching and heighten our marketing so that we can also have heightened anticipation. Currently, our company is focusing ourselves on the development of the game so that at the next review or disclosure, we can show you a more developed picture of our game. When the date of the reveal will be nearer, we will actually guide you to the detailed date and location. We will kindly ask for your understanding because, after the spread of COVID-19 last year, we have seen some uncertainties in the date and the format of the different events like E3, where we could have revealed our game. So please understand that now we have to think of the different options going forward. Now I will answer your question about DokeV and PLAN 8. DokeV and PLAN 8 have the target of launching dates of 2022 and 2023, respectively. And they are currently being developed on schedule without any delays to our internal schedule. In order to actually showcase what has been happening with the development of the DokeV game that we are planning to launch in 2022, we are planning to have a disclosure or reveal of the game in progress within 2021. However, we will let you know when we have the detailed schedule and the date and the method.