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 2021 First Quarter Earning 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 2021 first quarter earning results by Pearl Abyss.

[Interpreted] Good morning, and good evening. Thank you to all the analysts and investors from home and abroad for joining us for Q1 2021 Pearl Abyss earnings presentation. I would like to mention before we begin that the financial business results to be presented today as for the convenience of our investors and that they are subject to change pending final closing of the books. Furthermore, the accuracy and completeness of the financial and business performances disclosed in the presentation material are not guaranteed, and the company is not liable for any future update of the facts provided during today's earnings release. Today, we have with us CEO, Mr. Jung Kyeong-In; COO, Mr. Heo Jin Young; CBO, Mr. [ Kim Jeong Man ]; and CFO, Mr. Cho Seok Woo. The CFO will walk us through the highlights of the earnings release and then the management team of the company will take your questions or comments afterwards.

[Interpreted] Good morning. I am Cho Seok Woo, the CFO of Pearl Abyss. Thank you all for taking time out of your busy schedule to participate in today's earnings release call. Let me walk you through the highlights of business activities and results for Q1 2021. Based on our accumulated service know-how and experiences, we were able to successfully transition Black Desert service in North America and Europe into direct service, once again proving the company's global publishing capability. Online mobile console services are now directly published by the company, ensuring richer content for the users and enabling the company to secure better financial results. Not just for Black Desert but also for the future new titles, we were able to further solidify the brand for successful global launches. In Q1, Black Desert generated stable revenue in all territories growing 11% Q-o-Q. In particular, in North America and Europe, thanks to successful transition to direct publishing, operating revenue increased by more than 50%. On the first day of direct publishing in North America and Europe, active users increased by more than 200% and new users by more than 2,000%, leading to about KRW 20 billion of bookings for the month. After transitioning to direct service, we have tried to enhance the completeness of the game by holding online user events, communicating with the users and incorporating their opinions. Thanks to such efforts on the part of the company, Black Desert became the #1 MMORPG in terms of booking and popularity in North America and Europe on the Steam platform, making it the most successful and most widely known Korean game in the West. On the first anniversary of crossplay, Black Desert Console provided even richer content through simultaneous update of new class, Sage, on both PC and console as well as Nova class awakening. Black Desert Console entering its third year with its accumulated subscribers exceeding 3.3 million, was chosen as one of the Top 10 MMORPG to enjoy this year by Forbes and was also judged to be the MMORPG that is well optimized for the next-gen devices. As for Black Desert Mobile, on its third and second anniversary in Korea and Japan, respectively, efforts were exerted listen more closely to users' opinion and to provide more user-friendly services. The new class, Polaris, was simultaneously launched globally to the critical acclaim of large number of users. At the same time, efforts were made to strengthen the life cycle through various updates, such as the ones to improve user conveniences. Thanks to these efforts, user indices continue to be maintained well and the basis to provide long-term services could be further secured. In Q1, EVE Online continued to perform well with stable revenues coming in from all -- from its solid user base. [ Unit ] massive update plans were announced. We communicated actively with the users, and we also continue to provide excellent live services. The studio established last year in Britain announced that it was developing a new shooter game, and that it had specific plans to reveal more about its game. In February, EVE: Echoes received license approval in China, readying itself for its launch into the Chinese market. We would endeavor to produce good results, utilizing the local publishers' know-how of service provision in China as well as its global launching experiences. Both IPs, the Black Desert and EVE, may have launched at different time points, but their life cycle has been extended, thanks to superior global services and highly technical development capabilities. Going forward, we will continue to work to enhance our service capabilities so as to extend the life cycle of existing IPs and to produce excellent results for the new ones. Let me now cover the company's financial results for the first quarter. Operating revenue dropped 4.5% Q-o-Q to KRW 100.9 billion. Operating profit declined 34.5% Q-o-Q to KRW 13.1 billion, and net profit increased KRW 19.5 billion from the previous quarter to reach KRW 20.7 billion. Operating profit margin and net profit margin were 13% and 20.5%, respectively. During the quarter, monthly bookings from direct publishing in North America and Europe recorded KRW 20 billion. However, only 46% of it is recognized as operating revenue on the books and the remaining demand has been deferred. Let me now delve into more details about revenue. As for operating revenue for IP, the revenue from Black Desert in the quarter was KRW 82.9 billion, down 1.7% Q-o-Q. As for EVE IP, with stable online earnings results but with slightly weaker mobile performance, the IP recorded revenue of KRW 17.6 billion, lower by 8% from the previous quarter. As for revenue by region, operating revenue from Korea accounted for 20% and Asia 28% of the total revenue. Thanks to direct publishing services in North America and Europe, there was an increase of 7 percentage points, and these regions now account for 50% of overall revenue. About 53% of operating revenue in Q1 came from PC platform, 36% from mobile and 11% from console platform. Operating revenue for Black Desert grows, not only in North America and Europe, but also in Southeast Asia and Russia, enlarging PC platform's share of total revenue by 4 percentage points. Console maintained same contribution to the total revenue as previous quarter. Let me now cover operating expenses. Operating expenses in Q1 recorded KRW 87.8 billion, up 2.5% Q-o-Q. Labor expenses was KRW 36.4 billion, up 11.1% Q-o-Q due to increase in headcount and upwards adjustment of salaries. For your reference, as of end of first quarter, headcount increased by 77 people from last quarter to 1,285 people. These new additions are for new IP development and service provision. Headcount in development is 762, accounted for 59% of total headcount of the company. Commissions paid decreased by 2.9% Q-o-Q to post KRW 23.6 billion, thanks to reduction in market commissions. Advertisement expenses dropped 6.1% Q-o-Q and recorded KRW 15.1 billion. And lastly, let me provide you with some of the major highlights for the second quarter. Based on the stable financial results from providing live services of Black Desert and EVE, we will focus on developing new titles, including Crimson Desert. Progress on these development efforts will be made available to you on a gradual basis. For Black Desert, we are planning for simultaneous update of all new classes on all the platforms. Development road map for the second half of the year will be released, and the Heidel banquet for the users would be organized as a venue for users from all the platforms to mingle and communicate. For PC online, there will be an event to commemorate 3 years of self-publishing in Korea and Steam service will open in Japan. In major game markets, including the U.S. and Europe, we will continue to see growth through service enhancement and content updates that are more suited for these markets. On the console platform, consistent services will be provided with various updates, including those for The Ocean content, which were very popular on both on the online and mobile platforms. For mobile, there will be a simultaneous update of new class, Kunoichi, in all regions as well as renewal of the Great Desert in Japan. On all platforms for a Black Desert, global simultaneous live services will be strengthened, and we will endeavor to continuously produce excellent financial results. And for EVE IP, which will be celebrating 18 years of service, there will be various user participating events and updates. The IP will be celebrating its first anniversary of service in China since it first began the service in April of last year, and is preparing for a service that incorporates even more of local culture and sentiment. EVE Online has been producing consistent performance since its launch in China. We would prepare thoroughly so as to bring good results for EVE: Echoes China on the back of EVE IP's popularity in China as well as well-recognized capabilities of the local publishing partner. Accelerated efforts will be made for the development, revelation and launch of the Crimson Desert. Resources needed for the game are now being pooled together as development efforts are being spurred on. We are also contemplating very hard for the best possible timing and venue for the most effective showing of the game with the highest quality. We are enthusiastically developing DokeV with the goal of launching the IP by 2022. And to expand the interest in the game, we would make footages of the game public sometime this year. DokeV will be our very first metaverse game. With the superior attractive branding capability of our own engine, a virtual world that is pretty much like our real world will be realized. Within the game, a very high level of freedom for cultural experiences, socializing and economic activities will be allowed, enabling the users to experience a game that traverses back and forth between the real and virtual spaces. Besides developing these new IPs, preparations are underway for various extensions. CCP London Studio is currently developing our new project, which is a sci-fi multiplayer shooter game. As soon as we are ready, we will share with the market about the status of the project and continue to interact with the market. Games have become an important part of our lives, more than just entertainment needs. Through games, we make friends, run communities and in the future, build a social life that's firmly rooted around them. In alignment with this smartphone trend, we are preparing to provide the best possible experiences with true high-quality games, utilizing experiences and capabilities accumulated from providing live services and developing MMO games. Everyone at Pearl Abyss -- abyss, excuse me, under the leadership of the CEO, are doing the best they can to continuously grow and improve ourselves. We ask for your continued interest and support. Thank you. This concludes the earnings release presentation for Q1 2021 Pearl Abyss. We will now entertain any questions or comments you may have.

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

[Interpreted] [The first question is from Mr. Stanley Yang from JPMorgan.] My first question is in regards to Black Desert Online. And it seems that in every quarter, you'll be posting roughly about KRW 36 billion of revenue. And it seems that there is a gap between the revenue that is recognized and the amount that has been billed. And so I was just wondering is Europe revenue are going to continue to be the same as in Q1, in Q2 and the rest of the year. And how much revenue do you expect for Black Desert Online for the rest of the year -- for the whole year? That is the first question. And the second question is in regards to Crimson Desert and to DokeV. Well, you have announced, shown us some of the concerns or the thinking that you have in regards -- in the process of developing these titles. And I was just wondering when would be the launching time point or timing for these titles. What or -- have there been any changes to the business model? And when will you be disclosing any updates in the content of these games? And the third one is actually more of a request. You said that DokeV is your metaverse game, can you provide us more details about what that means?

[Interpreted] Let me answer your first question in regards to revenue from Black Desert Online. In regards to revenue for the first quarter, there are 2 factors to be considered. As we have a transition to self-publish and with direct service in North America and Europe, we have not been able to generate any revenue for the last month. So there was a revenue decline as a result of that. And let me also explain to you about deferrals or deferred amount on the book. In the first month, that is after the transition to us self-publishing, there was about KRW 20 billion of revenue, but only 46% of that was recognized as revenue on the book. And as for transition to self-publishing, that happened at the end of February. And so only about 1 months’ worth of revenue was recognized, and that is why it seems as if there's a larger effect of a deferred amount. We do expect to see improvement in our performance as these deferred amount will be recognized as our revenue starting in Q2 of the year.

[Interpreted] Now let me answer your question about the Crimson Desert and DokeV. Well, to expand more interest or expectations for Crimson Desert, we are preparing for the third disclosure in regards to this title. As we have shown at The Game Awards last December, we are planning for the third disclosure of the game, the Crimson Desert, at the event held by our publishing partners or at global game shows. So we will pick an event that we believe are to be the most influential. And we will make the disclosure sometime during the summer of the year. So in order to satisfy the expectations of the users around the world, we are preparing something more than what had been shown at last TGA. And as for the exact timing for the disclosure of the game, as we get closer to the date, we will make those dates available to you. Well, based on our know-how that we have accumulated by developing MMO games and providing these services, we are developing DokeV as a high-quality metaverse game. We expect that DokeV will provide users with new experiences, something that goes beyond playing an existing game. So people will enjoy playing the game together. And in the actual geography and topography that has been realized with 3D graphic technology, users will be able to enjoy very various content besides the game. They would be able to experience going forward, back and forth between the reality and virtual world. We believe that metaverse game is not something that is simply passing us by. We believe that this is a trend that reflects the needs of the users and that has been made possible with the development of technology. And so we do expect high growth in regards to the metaverse game. And we are confident that the performance or the results brought about by DokeV will be quite significant. [And that was the answers which have been provided by the CFO, Mr. Cho Seok Woo; and CEO, Mr. Jung Kyeong-In.]

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

[Interpreted] My first question is regards to the Black Desert. It seems that you have very stable revenue from Black Desert PC and Console. However, it seems that Black Desert Mobile, that is BDM, is not doing as well as those other platforms. And also compared to your competition, it seems that the revenue from BDM is not improving as quickly as anticipated. So can you give us the reason as to why? Is it because of the business model that you began with for this product? Or is it just the nature of the IP that is the reason for the stagnant revenue increase? And second question is related to DokeV. It's a new type of game. So in order to understand better exactly what this is, can you tell us of any games that you have benchmarked as you developed this one? Can you tell us what the business model is like? And what you expect the revenue to be from this game? I know you can't give us the specific numbers. But if you could, for instance, compare how it would do compared to, for instance, to your Crimson Desert?

[Interpreted] Let me first answer your question related to revenue for BDM. There is a different revenue, a trend per region because of differences in the life cycle brought on by a different launching period. As you know, the MMORPG game, as the service has been provided for extended period of time, there is some fatigue related to the game. So in Q1, we have released a class, Solaris, on mobile, which we did not provide for the PCs, so that we can provide more fun and some sort of freshness in playing the game on mobile. So as a result, in terms of user indices, we were able to see very stable indices relatively, that is saying in all regions. So in Q2, we will work on improving the conveniences for the existing users. And we're still improving overall gameplay for the new users. So that is a main -- the basis or solidifying the basis for the game plan. And we will also be holding diverse new user events as well as return the user events so that we can further improve user indices. So we will try to improve our profitability through more optimized operation as well as development of more rational or reasonable products.

[Interpreted] And there was also a question about the company's expectations in regards to DokeV and what the gain will look like. So the effort that the company has put in for development of DokeV is at par with the Crimson Desert. And therefore, we do expect similar results from DokeV as we have gained from the Crimson Desert. So we will be disclosing the footages of DokeV sometime within this year. So it is our belief that through these disclosures, you will be able to see more in concrete manner what the game is like, what the game looks like. And as for the exact date for these disclosures, I will share them with you at a later date. [So Mr. Heo Jin Young and Mr. Jung Kyeong-In, the COO and the CEO of the company, have provided you with the answers.]

[Foreign Language] The following question is by Kim Jingu from KTB Investment Securities (sic) [ KTB Investment & Securities ].

[Interpreted] I have two questions, and the first question is about DokeV. You said that the company would be disclosing the footages of the game sometime within the year. So can you give us a more specific date, the timing when the footage will be disclosed, what the color of that is going to be? And second, is in -- with the next-generation engine, which you have developed in-house, as well as your game development capabilities, what is the -- how far can you extend or how far can you scale up the metaverse game? And is there a possibility that there -- of collaboration or cooperation with other industries?

[Interpreted] And for your first question about DokeV, DokeV is being developed as we speak with the aim of launching or releasing the game by 2022. We are building on the content by organically connecting and combining the abundance of resources that we have pooled together so far. We don't have the exact date for the disclosures of the footages of the game within this year. But we will be providing those footages. And as for the timing, the dates, we'll share with them with you at a later date. The next gen engine that Pearl Abyss has developed on its own has, as its core technology, that of realizes the virtual space as if it were a real space. So geographic rendering technology of the engine combines the people, the things and these objects with AI technology and makes metaverse world more real. And yes, the possibility for the use of our company's engine in other fields besides the game is on the increase. And so we do believe that the value of our company's engine source technology will continue to grow. And I do believe that there is a possibility for a collaboration or cooperation with other industries. [That was Mr. Jung Kyeong-In, the CEO of the company.]

[Interpreted] It seems that we do not have any further questions or comments. So with this, we would like to conclude the earnings release call for Q1 '21 for Pearl Abyss. Thank you once again for your participation.

[Foreign Language] This concludes the Fiscal Year 2021 First Quarter Earnings Results by Pearl Abyss. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present, on the live call.]