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 2022 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 2022 first quarter earnings results by Pearl Abyss.

[Interpreted] Greetings. First of all, I'd like to express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2022 Q1 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 Pearl Abyss, CEO, Jung Kyeong-In; CBO, Kim Gyeong Man; and CFO, Cho Seok Woo. We will first hear the business performance presentation highlights from 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 our Q1 major business activities and performance. During Q1, both Black Desert and EVE continued steady performance, despite the macro difficulties as well as competitors' new titles and reopenings all showed solid results based on our loyal users. Black Desert wishes to have as a key word for 2022, the word refresh and look back at the service we have provided so far, and do our best to provide the best service. Apart from the new content to provide you enjoyment to users, in particular, we are working very hard to provide greater fun by improving and supplementing existing content. To this end, following the Calphe:ON Ball held in December of last year, Part 2 of Calphe:ON Ball was held in the first quarter. And by sharing the progress and implementation process of the road map we promised to existing users, we received greater claims. In the case of Black Desert Mobile, we had time with our users celebrating the fourth anniversary of Korean service and the third anniversary of Japanese service. We had events with users with various content and we've received positive response from users. Thanks to these efforts, Black Desert showed steady user indicators and was able to continue steady performance. Black Desert Mobile China service has had 3 tests and prepared for launching. And based on these tests, we have improved the game's completeness. EVE Online through a collaboration between BBC Studios Doctor Who, which broke down barriers between content and made efforts to provide something fresh to our users. We're also reorganized new player experiences, and we're constantly working hard to make it easier to reach new users. Next, I would like to explain about Q1 financial performance. This quarter's operating revenue posted KRW 91.4 billion and decreased 22.5% Q-o-Q. Operating profit and net profit, respectively posted KRW 5.2 billion and KRW 5.8 billion and decreased 79.8% and 36.3%, respectively. Operating profit margin posted 6%. I will elaborate on the operating revenue in more detail. First, I will explain about the operating revenue for each major IP. The operating revenue generated by Black Desert IP for this quarter was KRW 70.9 billion and it increased by 5.8% compared to the previous quarter. If IP operating revenue posted KRW 18.2 billion, maintaining the level of the previous quarter. In terms of operating revenue by region, Korea recorded 21%, Asia 27%; and North America, Europe 52%, and this maintained a level of the previous quarter without major changes. In terms of operating revenue per platform, 70% came from PC platform, 24% for mobile and 6% from console. Next, I will cover operating expenses. Operating expenses in Q1 recorded KRW 86.3 billion, a decrease of 6.5% from the previous quarter. In the case of labor expenses, it posted KRW 43.7 billion, down 0.6% from the previous quarter. For your reference, the number of employees as of the end of the first quarter was 1,485, a 87 headcount decrease from the previous quarter. Among them, there are 965 developers, 65% of the total employees. In case of commissions, it recorded KRW 20.6 billion, a 7.6% increase from the previous quarter. In the case of advertising expenses, it posted KRW 8.2 billion, a decrease of 42.6% compared to the previous quarter due to changes in the marketing method, due to the prolonged live service. Lastly, I would like to explain about the second half major highlights. We will steadily provide live service of Black Desert and EVE and do our best to prepare new games and new IP. Following the first quarter, Black Desert intends to show a more enjoyable and fun Black Desert by reinforcing existing content along with various new content. First of all, following Corsair, which was introduced last summer, we recently launched a new class, Drakania in about 9 months. In addition, a global update of the content of Mountain of Eternal Winter was recently carried out, which was first launched to Korea and positive reviews are continuing. In particular, we made efforts to create a variety of ways to enjoy the game according to the user's choice, such as the characters being able to start in a new area from the beginning, and we have been praised for capturing both new and existing users. In addition, we plan to improve and supplement Arena of Solare, a 3 to 3 PvP content based on user feedback and release this afterwards. In addition to this, we are preparing to convert Black Desert South American service to self-publishing. Through this, we will have the ability to directly publish in all regions except China. After 3 years since the pandemic, EVE Fanfest User Conference was recently held offline. We plan to communicate directly with users and have a good time with them and further strengthen the EVE community. In addition, we are preparing for a new game incorporating latest technologies such as Web 3.0 using the EVE IP. We will also share information about our new project in progress according to future progress. We are also working very hard to secure new growth engines. In the case of Black Desert Mobile China, which received the Chinese game license in June of last year. It was launched in April 26. Although part of the initial performance did not meet expectations, we are preparing to rebound the performance by providing various PvP experiences through a prepared update and by increasing the user inflow through diverse types of marketing, through collaboration with our partners. I would like to elaborate on the progress of the new IP. We are contemplating the most suitable place and method to give you news about Crimson Desert. And we know that you have been waiting for this for a long time. Once the release dates and methods are confirmed, we will notify you as soon as possible. We experienced many difficulties due to various external variables in Q1. In particular, there were certain things that were disappointing when releasing the game in accordance with the changed Chinese game license regulations. However, from Q2, we will do our best to prepare a solid financial foundation by analyzing and preparing for live service games more thoroughly. In addition, we will focus more on the development and marketing of new titles to bring results that meet the expectations of the market. 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.

[Interpreted] With this, we will conclude Pearl Abyss 2022 Q1 earnings release presentation and start the Q&A session.

[Interpreted] [Operator Instructions] The first question will be given by Kim Jingu from Kiwoom Securities.

[Interpreted] I have 2 large questions. The first question is about the development of your new titles such as Crimson Desert and DokeV. So can you tell us about what is the current stage of development? And can you tell us about the time line in which you will release or showcase in game videos and trailers? And can you also tell us about what will be the time line of its release? My second question is about another area and more about maybe a metaverse. Can you tell us about any businesses that you have in mind to have more competitiveness, such as metaverse? Can you tell us about your strategies and your mid- to long-term plans going forward? And what are you preparing to have potential to -- in this area?

[Interpreted] I would first like to answer your questions about new titles. Regarding our future titles, Crimson Desert and DokeV and PLAN 8. For Crimson Desert and for DokeV, we had already showed you some of the progress that we had made in detail. For Crimson Desert, in order to achieve the results that we have targeted and to give you the results that the users have been expecting and waiting for it is true that it is taking a little bit more time for us to release and show you about -- more about Crimson Desert, but the game is being developed very smoothly. In the case of AAA console game development, it is true that it is very challenging, but it is also true that internally, we are clearly making progress. All the development status, we are going to actually show you the progress once again within this year. In order to show you a more developed status of Crimson Desert, we are currently making our new trailers or videos. However, since we are planning to show you a 10-minute or longer play through video, we are thinking about which would be the best place to show this to the public. Crimson Desert so far has been making many efforts to target the western traditional console market that the Korean game companies haven't ventured into yet. Although it is taking a little bit more time than we had expected, we promised you that it won't have the quality and the game playing funds that can sufficiently rival AAA large titles. So we are going to promise you of the pricing playing experience. And you also asked us about a more detailed schedule going forward. And for the detailed schedule, we will disclose to the public when it is nearing the time of launching, and we wish to ask for your kind understanding about this. And in the case of DokeV, after showing you DokeV last year, we are concentrating on developing DokeV in order to show you a more developed version as well as simultaneously developing Crimson Desert. And regarding the business side, because we are more focusing on preparing to show you Crimson Desert, I will comment more on the development progress of DokeV in the future. You also asked us about the direction of our new business going forward. And we are planning many things in store. For example, we have DokeV that uses the metaverse platform as well as others that uses the Web 3.0 platform. So we are seeing the market trends. And to successfully launch Crimson Desert in line with the Western biggest market, the console market. And also to make DokeV into a metaverse platform and to showcase this to the market. And to have a new project, which I aforementioned, using the current market trend of block chains and Web 3.0 using the EVE IP. So we believe that as a game development studio, we are going to focus more on these and that will be our task going forward.

[Interpreted] Sorry, CEO, Jung Kyeong-In to answer the question. We will take the next question.

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

[Interpreted] I am Stanley Yang from JPMorgan, and I have several questions. You mentioned that in Q2, you are going to focus on the development of Crimson Desert and show us some of the new trailers or videos and I believe that you were supposed to launch this app within the end of this year. But are these plans not confirmed yet? Can you tell us about when this will be launched? Will it be within this year? My second question is about the BDM in China because I know that you had good results in the CBT, but it seems that after commercialization, the results are not as strong. So can you tell us what is the reason behind this? And can you tell us about any other plans or strategies to make the game have more revenues, although it may not be as popular or top playing as before?

[Interpreted] And thank you for your questions. You asked us a question about the launching schedule of Crimson Desert. And as we had mentioned, we are focusing on developing Crimson Desert with the target of launching within this year. And we are currently developing this with great efforts as we wish to truly commit to the promise that we have made before. Although we cannot definitely tell you -- definitively tell you about when it will be launched, we can tell you that we are doing our best to develop the game. So we are going to focus more on showing you the trailer video that we had promised you. And on the expectations after disclosing this, we are going to update you more completely on the schedule going forward.

[Interpreted] I would like to comment on Black Desert Mobile China. For Black Desert Mobile China, we launched this on April 26. And because it is in the early days of service, we are focusing on promoting the Black Desert IP. Regarding our current revenue trend, it is a little bit weaker than we had expected. First of all, on the first day of service, we had some network issues in China. So that is why we had some unsmooth operations, and that is why we couldn't get the early boom of effect after launching. In addition, what also influenced us was that according to the local regulations, we couldn't have the BM as strong as we had wanted. So it has to be set at a weaker pace. In the future updates, we will improve these issues, and we will have new content and such as new characters and we will strengthen our PvP so that we can provide a more strength in BM, and there's for wait for us to have a revenue rebound. In addition, in order to capture the new users that we have lost in the beginning and to retain our existing users, along with the publisher, we are planning to have a large-scale marketing along with our update. It is true that while we have been long waiting the delayed issuance of the Chinese game license because of the Chinese government restriction on new content there were heightened user expectations about Black Desert Mobile. And it is true that our expectations were very high as well. From 2019, when we decided to enter into China, it took us a long time for us to provide service. So during that time, a lot of our content became known to Chinese users. And that is why it was quite challenging for us to deliver something fresh to them. Our service in China is just beginning. Along with our experience in providing publishing our service to many countries around the world, we, as well as the local publisher will come up with the customized content and operations that meets the local environment, supplement and develop our game and do our best so that we can have a long-term service.

[Interpreted] It was CEO, Jung Kyeong-In and CBO; Kim Gyeong Man, that provided the answers. We will take the next question.

[Interpreted] The following question is by Ahn Jae-min from NH Investment Securities.

[Interpreted] I am Ahn Jae-min from NH Securities, and I have 2 questions. I couldn't hear the reason mentioned in your presentation before, but can you tell us about why your marketing expenses went down this quarter. Is it because of any changes in the accounting standard or in your strategy? And I have another question about labor. There are many concerns about labor and labor expenses in the game community. So also about the labor cost increase. And it seems that your number of employees actually was increasing, but had a decrease quarter. So can you tell us about the reason behind this? And can you also tell us about your forecast for future labor going forward?

[Interpreted] I would first like to answer your question about marketing expenses. And the reason why our marketing expenses went down is not because of any changes in the accounting standards, but because of our marketing strategy. And regarding the efficiency of marketing expenses of Black Desert, Black Desert Mobile and EVE IP, we have been reviewing this. And through these reviews, we have been working very hard to make the marketing expenses more efficient. So you can take our decreased marketing expenses as a result of these efforts. I would like to answer your second question about our number of employees and about our labor expenses. When you see the head count go down for this quarter, it is not because there was a great decrease of our employees. It is because the internship we had in the previous quarter has ended. We believe that it will have no impact on the development of our new titles or about our live service. It is true that, as you had mentioned, for labor expenses in the IT industry and in the content industry, we are seeing a rise in the labor expenses. However, our company had made a lot of fees of increases last year. And through various methods, we are working very hard to retain our employees. So we believe that there will not be any special characteristics in our labor expenses or a rise in our labor expenses this year.

[Interpreted] It was our CFO, Cho Seok Woo, who answered your questions. We will take the next question.

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

[Interpreted] I have several questions, and I am Eric Cha from Goldman Sachs. And first of all, I think you mentioned -- maybe you mentioned this, but maybe I didn't hear it, but I don't think you had mentioned anything about Black Clover, your new IP. So can you remind us a little bit more about that situation? My second question is about Black Desert Mobile China. You mentioned that it did not meet your expectations. And I know that it will be very hard for you to disclose the revenue for the Black Desert Mobile China so far. But can you maybe tell us about the first day your daily revenue? Or what about the trends compared to, for example, launching a first day in other regions or countries. So can you tell us maybe if there was a difference? And third question is about you mentioned that because of the regulations, you didn't -- you had a weaker BM in the beginning. So do you think it will be challenging for you to have a stronger BM going forward?

[Interpreted] I would first like to answer your question about our new IP Black Clover. Black Clover is a game that is being developed by the BIG-GAME Studio that we have 43% shares in. As you probably know, Black Clover has many fans around the world because it has been a very successful global IP. In addition, because the top animation RPG developers are developing this game and the quality and game playing experience is getting better and better, we believe that it will bring great results. And as we had mentioned this to you before, we plan to have a CBT in Q2 and to have simultaneous launch chain in the latter half of this year in Korea and in Japan, so this will meet the schedule that we had updated you on before.

[Interpreted] I would like to answer your question about the Black Desert Mobile China and the current situation. As you probably understand, we would like to ask for your kind understanding that regarding the details of the revenue and indicators, it is within the rights of the publisher. So we cannot give you more information. So please understand. And regarding what has been a bit disappointing about the business results of Black Desert Mobile China was about the inflow of users. And it is true that because of many of these users came in through marketing compared to the CBT, it was hard for the users to remain. However, in terms of revenues, when we compare the user revenues to CBT, it was at a similar level, and we are seeing it grow as our live service progresses. And we are working very hard with the publisher in order to have more users come in and remain with us because we know that in China during the time this market situation has changed, and the users' expectations have gotten higher and higher. So we are working very hard in order to respond to these changes. And regarding the BM, because we have made some preparations and we already have some plans, we believe confidently that the revenues per user can reach our goals going forward. And as you had commented, we understand that it will not be easy for us to boost our performance. However, we still think that China still remains a large market. And we are still in our early base of our launching. So we believe that if both of us do our best, then we can have good results.

[Interpreted] It was our CFO, Cho Seok Woo; and CEO, Jung Kyeong-In, who answered your questions. It seems that there are no other questions in the queue. So with this, we will conclude 2022 Q1 earnings presentation by Pearl Abyss. Thank you very much for your participation.

[Interpreted] This completes the fiscal year 2022 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.]