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 2021 fourth 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 fourth quarter earning results by Pearl Abyss.

[Interpreted] First of all, I express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2021 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 and 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 at the earnings presentation today, Pearl Abyss CEO, Jung Kyeong-In; COO Heo Jin Young; CBO, Kim Gyeong Man; and CFO, Cho Seok Woo. We will first share the detailed business performance presentation 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 once again for taking part in our company's earnings conference call despite your busy schedules. First, I would like to elaborate on Q4 major business activities and performance. In Q4, both Black Desert and EVE were chosen as one of the top 10 MMO games which provided the most stable live service in 2021, and Black Desert and EVE IP continued stable service. However, we did not stop at this. And through many attempts, we not only continued expansion of existing IP but also continued to prepare for new growth. Black Desert in particular did our best to show content that would add fun to the game. In Q4, as a part of these efforts, the new region Everfrost, which strengthened the story aspect, was added. And the Character Reboot, which improves the class balance, took place. And we provided content based on communication with our users. As a part of these efforts, at the Calphe:ON Ball, which took place in December, 550,000 global users participated, and we climbed to #2 in the game category on Twitch and recorded the highest number of participants ever since we started user meetings. In addition, in order to listen to the opinion of users that we could not at the ball, we held a separate live broadcast and genuinely tried our best to communicate with our users. Black Desert Mobile China service, after receiving the Chinese game license in June of last year, conducted 3 tests. And we are heightening our possibility of success in the Chinese market. At the technical test, which took place in November of last year, we tested smooth activation in diverse mobile devices and at markets. And at the Elite test, which took place recently in January, most of the launch built in BM was reflected. And along with user feedback, we aim to get knowledge about play and payment patterns. For EVE Online, which marks its 19th year anniversary this year, we're aiming to have both growth, expanding the EVE universe and change through new technology application. At the biggest tournament of the year, Alliance Tournament, which took place in November of last year, we adopted blockchain-based technology NFT as a reward and aim to provide new funds to our users. Apart from this, we presented Black Space Engine at G-STAR in November last year. And at the December The Game Awards, we showed our DokeV music video. And along with our engine technical capability, we showed our limitless potential as a metaverse game. Next, I would like to explain about our Q4 financial performance. This quarter's operating revenue and operating profit, respectively, increased 22.4% and 152% Q-o-Q, respectively, and posted KRW 118 billion and KRW 25.7 billion, respectively. Net profit posted KRW 10.8 billion, a 59.7% drop Q-o-Q. Operating profit rate and net profit rate each posted 22% and 9%, respectively. I will now explain in more detail about operating revenue. First, I will explain about major IP operating revenue. The operating revenue from Black Desert IP in this quarter posted KRW 67 billion and decreased 5.5% Q-o-Q. EVE IP posted KRW 18.4 billion of operating revenue, a 2.1% decline Q-o-Q. For regional operational revenue, the breakdown was 18% for Korea, 29% for Asia and 53% for North America and Europe and maintained last quarter's level. For the operating revenue for different platforms, among the Q4 operating revenue, 67% was from PC platform, 25% was from mobile and 8% from console. I would now like to cover operating expenses. Q4 operating expense posted KRW 92.3 billion, a 7.1% increase Q-o-Q. In the case of labor expenses, it posted KRW 44 billion, a 6.5% increase Q-o-Q. For your reference, the numbers of employees as of end Q4 posted 1,572 head count, a 69-person increase Q-o-Q. The numbers of developers among the employees was 983, 63% of the total employees. In the case of commissions, it posted KRW 19.1 billion, a 6.1% increase Q-o-Q. In the case of advertising expenses, it posted KRW 14.3 billion, a 20.6% increase Q-o-Q due to participating in the year-end marketing and participation in TGA. Last but not least, I would like to explain about 2022 first half major highlights. We will present steady live service of Black Desert and EVE and do our best for the launch of Black Desert Mobile in China and new IP marketing. Last year, Black Desert made many attempts for growth and change. This year, we aim to well stabilize these changes and develop them to present a more enjoyable and fun Black Desert. First, after the Character Reboot, which took place recently, based on the feedback in the first half as well, we will continuously improve our class balance. In addition, in order to continuously improve existing PvP content, we will also present new PvP content as well. Apart from this, after the last Calphe:ON Ball, we have plans to conduct global online streaming to listen to the opinions of users and share the development status. In the case of EVE, we will strengthen service in China through holding Fanfest with Chinese users and through other ways. In addition, we are preparing for new types of service through taking into consideration the changed preference of users and the diverse ecosystem changes. We are planning to have a large-scale CBT for the launch of Black Desert Mobile service in China that you have been waiting for a long time. In addition, we are expecting to launch soon afterwards. Based on the previous Elite test, the current game is getting more complete and more fun to play. We will soon update you on the CBT and launch schedule through our local publishers. I will now update you on the new IP status. Through gamescom and TGA last year, we disclosed DokeV 2 times. Since the launch of new titles is nearing this year, we plan to more frequently disclose and communicate regarding our new titles. In particular, we will do our best to quickly give you news about Crimson Desert that many of you are curious about. In addition, apart from the IP that we have introduced to you until now, we plan to disclose preparations for the new games that were disclosed from last year and also disclose games that studios are newly developing. As we had showed you how one successful IP can bring great results until now, we will also do our best so that even compared to the existing IPs, the new IPs can bring bigger results. While expanding and growing the regions and platforms for Black Desert after listing in 2017, based on our new engine, we have developed 3 new titles and have been communicating the process. In addition, through diverse technologies and equity investment, we have secured new growth engines. 2022 will be a year to show you one by one what we have been preparing and newly leap forward. Apart from Black Desert and EVE that had been a stable financial basis, we are expecting line of diversification and financial success through IP expansion and new titles. In addition, we are working hard not only to have games that simply respond to new technologies based on metaverse and blockchain but also games that focus on the genuine game playing experience itself so that it can provide a surprising playing experience that goes beyond simple crypto games and metaverse games. In order to become a better company, all employees from our CEO to all employees are doing our best. We will ask for your continued interest and encouragement. Thank you very much.

[Interpreted] With this, we will conclude the Pearl Abyss 2021 Q4 earnings release and start the Q&A session.

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

[Interpreted] I have 2 large questions. First is about Black Desert Mobile China service. And you mentioned that you're going to have a CBT. So does the CBT mean that it's going to be commercialized then? Or what is the process after the CBT? Also, what are the expectations the publisher and your company is having for the launch of the game? And how much of results do you expect? My second question is about the launching schedule and commercialization of Crimson Desert and Black Clover because to my knowledge, I think both games are planned to be launched and commercialized this year. Can you tell us about what are the expectations by the management for the results of both games launching?

[Interpreted] Thank you for the questions. I would first like to answer the question about Black Desert Mobile China. Black Desert Mobile China, based on the know-how of the local publisher, has been complementing the existing game and is working hard to show a more upgraded version of the game. If we say that in November of last year, we had the technical test in order to respond to the most stores and devices as possible, at the lead test, which took place in January this year, we had seen a realistic build level content and [ DM ], and we aim to receive response and feedback to our -- from our users. As a result of the test, most of the indexes were greatly improved. And most of the index, including our retention rate and paying user conversion rates actually reached our expectations. In order to give you more information about the launching date and schedule, we had a read on the Black Desert Mobile Chinese CBT date and the launching date with our publishers. So both dates have been confirmed. We plan to have a large-scale CBT with many people -- many users within Q1 and then have a quick launch afterwards. Due to the publishers marketing plan, please understand that we cannot give you more details about the launch schedule. And we are going to repay your long waiting period with good results. Regarding our anticipated results, Black Desert Mobile China actually at the gameplay award by China's biggest game site 17173 was picked as one of the most waited for games in 2020, along with other games such as Diablo and New World. And we were included in the 18 most anticipated games for 2022. Because the launch is nearing, users' interest and expectations about the results is heightening. The local publisher, also with the upcoming large-scale CBT and launch, is planning to heighten its marketing expertise. In order to reach the biggest results and performance, game optimization is also within its last stages. We are going to do our best and exert all of the development capabilities that we have accumulated so that this is not just a simple regional expansion but a game that can successfully take deep root in the Chinese market.

[Interpreted] I would like to answer your second question about Crimson Desert. Crimson Desert, based on its very strong storyline and immersive capabilities, is being developed as a AAA game that goes beyond global top class titles. In particular, when we take into consideration the high-quality graphics, action-packed play that has been implemented through our next-generation engine, we expect there could be great results that actually surpass other competitors. Crimson Desert is trying our best in order to enhance the completeness of the game and is preparing for launch. Please understand that regarding the details of our launch schedule, we cannot share with you at this time. However, we know that many of you are waiting and have high expectations. So we're going to be thoroughly preparing to show you the best game possible.

[Interpreted] I would like to answer your next question about Black Clover. Black Clover, based on the Black Clover IP, is being developed by our subsidiary, Vic Game Studios, as a mobile game. The developers at Vic Game Studios have the highest level of 3D cartoon vendoring technologies, and they have experience of making the previous titles globally popular. Black Clover, as of the first half of 2021, has sold 17 million copies and is a very famous Japanese cartoon. And it has been also made into an animation and is a very popular global IP. Even from the beginning, we had very high expectations, and the IP holders also, we understood that there was a common understanding that this would lead to great results. So we are expecting very great performance as well. As was presented in the media recently, Black Clover is planning to have an FGT within this month. And in Q2, we are planning to have CBT. And in the latter half of this year, we plan to have simultaneously launching in Korea and Japan.

[Interpreted] The answers were provided by our CEO, Jung Kyeong-In; our CBO, Kim Gyeong Man; and CFO, Cho Seok Woo.

[Interpreted] the following question is by Sung Jong Hwa from eBest Investment Securities.

[Interpreted] I have 2 large questions. First is about your P2E strategy. There has been talk about applying NFT to DokeV. And in the case of EVE Online by CCP Games, there has been, I think, some news about P2E or metaverse types of characteristics that might go within the game. So can you tell us about blockchain or P2E-related strategies related to your IPs? And my second question is about your revenues because on a consolidated basis, it seems that KRW 118 billion of revenues exist and KRW 85.4 billion is from the games, so KRW 35.4 billion or so is from additional revenue sources. So can we think of that as coming from valuation gains from your capital subsidiary?

[Interpreted] I would like to answer your first question. The game industry is rapidly changing. Within the game, there were content consumption and goods or items accumulation that just happen limited to the virtual world. But now types have changed, and now the values that the users have created have meaning even outside of the virtual world and are acting as assets. The need to create value by playing games actually existed even before play and earn, which is a buzzword nowadays, has existed. We can see many trends that happened from the past. For example, with the development of video games in the early 2000s, there was the wild popularity of e-sports. And after the distribution of smartphones, we saw more game streaming broadcast that took place. We also see people that are actually having a job that are done through playing games, and they're making a living, and they call this their job. So all of this attests to the need to create value through games. Likewise, through the development of technology, times are changing from just the past state of playing simply a game that has been given, but now we have users that actively participate, and the structure has changed so they can also create profit through this. In particular, we believe that blockchain technology will accelerate this trend. Through these changes, our company have been researching different technologies during the past years and have reviewed the possibility of introduction. We will shortly communicate with you in different stages about what we are currently preparing for. Our company and CCP Games both have operated MMO for a long time. And we do have the know-how to maintain and manage a sustainable economic system. So we are confident that we can create a stable blockchain ecosystem.

[Interpreted] Next, I would like to tell you about details regarding the operating revenue apart from the major game revenue that you have asked about. In Q4, including Pearl Abyss Capital, we had different operating revenue sources. And as you had mentioned, apart from our IP game-related operating revenues, we have KRW 32.6 billion of operating revenues at our subsidiary, Pearl Abyss Capital. And it includes the revenues from our valuation and disposition gains. Along with the expansion of our game business, we have been continuously preparing for nongame profits, in particular, through our investment profits and revenues. It is because we want to rapidly respond to the market and not just have profit increases through a capital increase or capital profits but also invest in companies and technologies that can provide synergy with our company and to rapidly respond to the changing market. We will do our best so that we can have good performance in the mid- to long term as well.

[Interpreted] The answers were provided by our CEO, Jung Kyeong-In; and our CFO, Cho Seok Woo.

[Interpreted] The following question is by Mike Hong from CGS-CIMB Securities.

[Interpreted] I have 2 questions. First is the fact that you mentioned that at the end of last year, there was a large-scale update of Black Desert and users increased. So can you tell us about if the user numbers are being maintained and more of some specific numbers? Second question about your engine because I know that you have been continuously developing your engine. Do you have any other business plans to utilize the engine going forward?

[Interpreted] I would like to answer your question regarding the update of Black Desert. Black Desert Q4 operating revenue maintains its previous level. As we have seen, very stable revenue flow in all regions after our Character Reboot that took place in late December last year and the update of Everfrost, we could see that the sales grew by a large scale. In particular, we see that the user index, which rebounded in December, has been continuing until recently. So we expect there to be encouraging results in Q1 as well. Black Desert has been loved for the last 8 years, and we believe that it's because there is a unique playing experience and value in playing the game. We will do our best to maintain the playing experience and the value so that it can become more beloved as time goes by.

[Interpreted] I would like to answer your second question. We have been preparing for metaverse business that uses our next-generation engine and related technologies. We believe that our next-generation engine's performance have competitiveness even compared to the engines that are now being used in commercial games that are successful. And we believe that the scope of utilization of our engine can be used going beyond the game industry. However, currently, our first priority is on the development of new games and to launch the new games. Regarding our foray into metaverse business, utilizing our next-generation engine, we will share with you the details as soon as we are able to.

[Interpreted] the answers were provided by our COO, Heo Jin Young; and CEO, Jung Kyeong-In.

[Interpreted] The following question is by Lee Dong-ryun from KB Securities.

[Interpreted] I have a question about the Pearl Abyss Capital valuation and disposition gains that you have remarked upon. Can you tell us about the profit contribution to that in the total revenue? And in Q4, can you tell us about the profit rate or profitability of your game business as well?

[Interpreted] I would like to explain in more detail about Pearl Abyss Capital valuation and disposition gains. Regarding the other revenues, apart from our IP game itself, about KRW 30 billion was derived from Pearl Abyss Capital, and the other revenues came from our IP-related music sources and our sales from other subsidiaries. Our game-related sales and revenues are very stabilized, and we believe that they will be maintained.

[Interpreted] The answer was provided by our CFO, Cho Seok Woo. Thank you very much. It seems that there are no other questions in the queue. And with this, we will conclude 2021 Q4 earnings release by Pearl Abyss. Thank you for listening.

[Interpreted] This concludes the fiscal year 2021 fourth 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.]