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 will begin the conference call of the fiscal year 2022 third quarter earnings results by Pearl Abyss. This conference call 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 Third Quarter Earnings Results by Pearl Abyss.

[Foreign Language]

[Interpreted] Greetings. First of all, I express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2022 Q3 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're happy you're with us in the earnings presentation today, Pearl Abyss' CEO, Kyeong-In Jung; CBO, Kim Gyeong Man; and CFO, Seok Cho. We will first hear the business performance presentation highlights from CFO Seok Cho, and then engage in a Q&A session.

[Foreign Language]

[Interpreted] Greetings. I am Pearl Abyss CFO Seok Cho. Thank you once again for taking part in our company's earnings conference call despite your busy schedules. First, I will cover 2, 3 major business activities and performance. Black Desert and EVE, thanks to stable live service continued to perform well in the third quarter. Black Desert also strengthened user communication in the third quarter as well. In July, a Heidel Ball for mobile users was held, and it was held offline for the first time in 2 years, along with the introduction of second half content, we had various programs such as participatory events and dialogue with developers. Due to these efforts, both new and returning users increased significantly, and we could confirm the heightened user satisfaction. Also, Voice of Adventurers was held in July and Heidel 2022 was held in September. And with these 2 consecutive events, we continue to communicate with PC and console users. During the third quarter, Black Desert had a large-scale content update. Online and console released Drakania Real Wakening and we could confirm that improvement of the user index led to good performance. Mobile launched new process, Drakania and Bogen, and we were able to confirm that user trends improved. EVE online as part of last year's evolved content had updates of agent and ARC content. The agent update, which improved the AIR Career Program that provides job lights, helped settle new users and ARCupdate, which strengthened the narrative of the game received favorable reviews from many users who like the story. In addition, we opened a new server so that Chinese users can properly experience the attractiveness of EVE. In addition, a Spanish version was also released and the user pool was expanded. Black Desert and EVE live service based on communication with users has been performing well for a long time. Going forward, we will continue to work hard to understand the user and to think from the user's point of view and provide the best service. I would like to touch upon our company's Q3 financial results. Operating revenue for the quarter posted KRW 97.3 billion, up 3.5% from the previous quarter. Operating profit turned to the black at KRW 12 billion, and net income was KRW 21.3 billion, down 33.4% from the previous quarter. I would like to explain about the operating revenue in more detail. I will explain about the operating revenue by core IP. The operating revenue generated by Black Digit IP for the quarter was KRW 76.6 billion, and it increased by 3.1% from the previous quarter. If IP operating revenue posted KRW 19.4 billion, up 10.2% from the previous quarter. In the case of operating revenue breakdown by region, it was 18% in Korea, 26% in Asia and 56% in North America and Europe. In the case of operating revenue breakdown by platform, 77% was PC, 16% was mobile and 7% was com sold. Next, I will cover operating expenses. Q3 operating expenses went down 13.2% Q-o-Q and posted KRW 85.3 billion. For labor expenses, it posted KRW 40.9 billion, a 19.2% decrease Q-o-Q. This was a decrease due to the exclusion of about KRW 8 billion of one-off incentives which took part in the previous quarter. For your reference, as of the end of the third quarter, we have 1,456 employees. Among them, there are 907 developers, which is 62% of the total workforce. In the case of commissions, it recorded KRW 16.6 billion, a decrease of 22% Q-o-Q. In the case of advertising expenses, it recorded KRW 9.4 billion, a decrease of 13.2% from the previous quarter. Lastly, I would like to explain about Q4 major highlights. We will steadily provide Black Desert and EVE steady live service and do our best to prepare for a new IP. Black Desert also in Q4, will introduce a variety of new content. Recently, Lakes updated a bit 1 magnet through this update by making it easier for new users to move between regions, which new users found challenging in the past, we implemented an environment where new users can play comfortably. Black Desert is an MMORPG game, and as the service ages, the amount of content becomes more and more vast. So barriers to entry are bound to rise. Therefore, our development team spent a long time coming up with ways to help new users settle and have started to provide madness content. Also, after the actual update, it became easier and more convenient to continue playing. So we could confirm that both new and existing user satisfaction was increased. Mobile has recently updated the new region Dragon. Dragon is a new hunting ground, reflecting the user's opinions that there is not enough hunting ground. We implemented an environment where you can enjoy hunting and new adventures more efficiently. In addition, following the last quarter, we plan to strengthen communication with users in Q4. In October, we participated in the Twitch Con event in San Diego U.S. and increased contact with local users. And in December, voice of adventurers will be held in Amsterdam, and Calphe: ON Ball will be held off-line in LA, and we plan to strengthen further our relationship with overseas users. EVE is planning to carry out the uprising update in Q4. Uprising is an expansion pack, which has been prepared over the past year, and we plan to introduce more immersive new content such as through war reorganization. Also in December, a EVE Vegas user conference will be held in Las Vegas. I would like to cover the progress of our new IP. Crimson Desert is dedicated to development to show you the best quality. We are also thinking hard about the most suitable place and methods to share news about Crimson Desert to many people. When we set the date and method for disclosure, we will let everyone know. DCP Games is preparing for a web 3.0 base blockchain-related business. As it is an area where there are many expectations as well as concerns, we have been preparing for a long time after various discussions and have been proceeding. In the last quarter, we conducted a preset rounding and even in the recent climate when there is a negative crypto market economy, we were able to have quite a success. In order not to harm the experience of existing users, we plan to apply this blockchain technology not to an existing game, but to a new game that has not been announced yet. So we will inform you as we make progress. Despite the many challenges caused by the COVID pandemic, we made efforts to increase contact points with users and provide user-friendly services. In particular, as a 9-year-old MMORPG game with new and fresh content, we work hard to add funds to existing users and lower the entry barrier for new users and secure more users. We will maintain financial stability through steady live services and focus on new IP development. In order to be the best we can be all employees from our CEO to all of our employees are doing our best to make this happen. We will ask for your continued interest and support. Thank you very much.

[Foreign Language] [Operator Instructions] The first question will be provided by Jingu Kim from Kiwoom Securities.

[Foreign Language]

[Interpreted] Thank you for this opportunity. I have 2 questions. The first question is about your earnings. And actually, it is first related to the numbers of your developers coming down from the previous quarter. So can you tell us if there is a specific reason behind that? And another related question is about your operating profit because it seems that it has increased from the previous quarter. And do you believe that this is sustainable until you have the release of your new title? My second question is about Crimson Desert in-game footage if you can actually -- when do you think you can disclose this to the public and about plans for it going forward? So can you give us answers related to that, if possible? Thank you very much.

[Foreign Language]

[Interpreted] I would like to answer your first question about the change in our number of employees. As you have mentioned, as of the end of Q3, the numbers of employees at our company is 1,456. So we had about 59% decrease compared to the previous quarter. And relating to the reason behind that, it is because most of these employees were actually a result of the completion of our internship program that took part in the first part of this year. We also have plans to have a winter job-related internship program, but we plan to have a conservative policy regarding the operation and management of our HR. You also asked a question about our operating profit. And as you can see for our PC-based and mobile Black Desert and EVE, we have seen very stable profits, and we are maintaining these profits going forward. And despite the efforts involved in the development of new titles, we will continue on with our services and do our best so that keep costs we are implementing are very efficient. I would like to answer your next question about Crimson Desert Disclosure and DokeV. Regarding the in-game trailer disclosure of Crimson Desert that many people have high expectations for. I would like to actually give you my apologies about the fact that the in-game trailer of Crimson Desert has been delayed. Currently, Crimson Desert is being developed at a very sufficient level that can meet the high expectations of global console users. We have been continuing the B2B marketing that we have been continuing from this summer, and we will continue to do this in Q3 as well. And we have been actually talking to our partners about the game, verification and coming up with many different ways to have cooperative measures. In the case of our company, since this is the first time we are making a challenge in the traditional console market -- the advice and cooperation with many experienced global partners, we believe, is a very important factor in our success. For Crimson Desert, we believe that it has almost reached the level that we would like to have before we disclose the content. Actually, we also consider the possibility of having a short disclosure of the in-game trailers at a global event at the end of the year. However, because of the many options that we are considering because we believe that we are making the right judgment for our business, we believe that disclosure within this year will be quite difficult. Regarding the fact that you have had to wait for such a long time, we will ask for the deep understanding from our investors. Because we are fully aware of your weight and the fact that you have very high expectations, we will do our best to strictly prepare and disclose the best level of the game possible. Second, I would like to give you an update on the progress of DokeV. DokeV, along with Crimson Desert is being developed, meeting our internal development road map. However, since this year, our core development team is immersing itself on developing Crimson Desert. We will do our best so that for DokeV, we will be able to disclose additional information as they are done. We heard from our CFO, Seok Cho; and our CEO, Kyeong-In Jung.

[Foreign Language] The following question will be presented by Stanley Yang from JPMorgan.

[Foreign Language]

[Interpreted] Thank you for this opportunity. And I'm curious about what kind of feedback you're getting from your partners regarding Crimson Desert because you mentioned that you have B2B marketing with them. So can you share with us what kind of positive feedback and other feedback you have been receiving if they want you to improve some part of the content? Second question is about your release date because you mentioned that you have almost reached the high level of quality that you have been trying to go for. So I believe that you have not actually given us a date about when you will release the game after its completion. So I think we are seeing some uncertainty rising. So do you believe that you will be able to release the game by the latter half of next year? Or do you think that it might go beyond that date? Thank you.

[Foreign Language]

[Interpreted] I would like to give you a short answer about the feedback we have been receiving about Crimson Desert from our partners. Actually, from this summer, we have been very frequently inviting our global partners even almost every week and carrying out B2B marketing with them. Our purpose is to actually see if the game Crimson Desert that we are aiming to become a global title is actually reaching the level that we have been expecting. Against our internal concerns, our partners actually have been very positive with the feedback. Regarding the Black Space engine that we have developed in-house, they were actually very surprised at the level of its completeness. And they were very impressed with our differentiated action, the VAT background and interactions with NPC. With the unexpected level of positive feedback and responses we are getting from our partners, the confidence that we are having in the game is actually heightening. We have had many frequent visits from our major global partners even as we speak and have been receiving very rich feedback. So we believe that we will be able to heighten the degree of completeness until its release and to have results that can rival or even surpass the global famous titles in the world. And regarding the release date, we do know that although we have a very high level of confidence in the game, we are seeing some market uncertainties. I'm sure that you will be able to see what I am talking about when we show you the in-game trailer in the near future. And we believe that we don't have a lot of time left until we complete the game. And we are expecting to complete the development of the game within the latter part of next year. However, for the exact release date, we do need to consult the market situation and our partners. So as soon as it is set, we will let you know. The answer was given by our CEO, Kyeong-In Jung.

[Foreign Language] The following question will be presented by Junhyun Kim from HSBC.

[Foreign Language]

[Interpreted] Thank you for the opportunity. I have a question firstly regarding the numbers of those in the development field at your company that are dedicated to Crimson Desert. So can you actually give us the breakdown of them? And if you can give us what comprises your team for new title development and how the manpower is allocated, it will be greatly appreciated. And I think you have mentioned that Crimson Desert will be released in 2020, 2021, it has been actually being delayed. So can you give us the main reason why do you think this is becoming delayed. I think as time passes, the gamers actually level of expectations are going up. So I think this can act as a burden on you. So can you tell us about your current situation and the competitive landscape?

[Foreign Language]

[Interpreted] Thank you very much for the 2 challenging questions. I will try my best to answer those 2 questions. And regarding the development structure behind Crimson desert development as we have emphasized in our philosophy of developing games, we do not have an independent studio type of having a certain number of dedicated personnel for each project. Although we do have different teams for different projects, you can think of our main core developers or personnel that are actually shared between the different projects that we have. That is why we are able to have the simultaneous development of DokeV and Crimson Desert. But regarding our major developers that are in the engine development, a lot of them are actually participating in the development of Crimson Desert. So you can think of more than 50% of them being involved in Crimson desert development. However, regarding the development technology and development output, we believe that this is a very good fundamental for this to be applied to other areas. So we believe that this will actually accelerate the development speed of other projects going forward. And regarding why the release has been delaying, Well, I believe that as we are getting to know more deeply about the console market, we are recognizing that we need a little bit of more time for us to reach a very high level of completeness. And I believe that actually a more bigger reason behind this delay is that the speed of technology development has been very rapid compared to when we first started the project. Actually, when we think about the engine technology, cinematic type of methods and using AI-related technology, we have seen a breathtaking development. And we have actually been developing our engine ourselves. So we actually really wanted to include those developed technologies to our game. So please understand our intention that we wanted to bring the best technologies into the game. So that took a little bit more time than expected. It was answered by our CEO, Kyeong-In Jung.

[Foreign Language] We will take the next question. The following question will be presented by Jae-min Ahn from NH Investment and Securities.

[Foreign Language]

[Interpreted] Thank you for this opportunity. I'm Jae-min Ahn from NH Investment Securities. And I think a lot of my questions have been covered already. So I would just like to ask a few questions about DokeV because in the market, there were some rumors that the DokeV project team actually combusted, which means that they actually left the company. So can you tell us about what has been going on? And listening to the presentation and answers today, it seems that if crimson desert is completed by the end of next year, then the release date might be actually later than that. So can you tell us about when you think DokeV will be completed? Do you think it will be pushed back because of these delays? And can you tell us about the DokeV development team as well?

[Foreign Language]

[Interpreted] When we have very large-scale development projects, it takes a very long time. So we tend to have people that move in and out. And regarding DokeV, we have disclosed some in-game fotage in the past. And we believe that we have actually reached a level where it is currently being met in the direction that we have been aiming for. And it is true that we have had some people that have left the team but we do not believe that it has a big impact on the development of DokeV going forward. However, for DokeV release date, we mentioned that it will be after we released Crimson Desert. So we believe that since we will need some more time for us to release Crimson Desert, probably DokeV release date will be pushed back to after next year. However, as I aforementioned, regarding the technology and the results from our Crimson Desert measure development, a lot of that will be applied to DokeV as well. So we believe that actually not long after Crimson Desert is released, we will see a very rapid release of DokeV. It was answered by our CEO, Kyeong-In Jung.

[Foreign Language] The following question will be presented by Ui Hoon Jeong from Eugene Investment and Securities.

[Foreign Language]

[Interpreted] Thank you for the opportunity. I am Ui Hoon Jeong from Eugene Investment and Securities. I have a first question about your expenses. And regarding your labor expenses, you have mentioned some facts. And can you give us your take on marketing expenses expectations for Q4 and for next year as well? And I think you mentioned that Black Clover will be released within the first half of the year. So can you give us the schedule update for that? And I think it is for equity investment as well. So do you think that with using exercising call option, it can be consolidated to your financials?

[Foreign Language]

[Interpreted] I would like to answer your first question related to marketing expenses. As for what took place in Q3, in Q4 as well, we are going to efficiently carry out our marketing expenses with our live service. We believe that the marketing costs will probably go up because we are going to have the release of new IPs and disclosures of them going forward. However, we will try to come up with more effective and efficient ways so that we can lower our expense burden. I would like to answer. your question regarding Black Clover. Regarding all the developers that we have invested in, including big games, they are all being operated as independent studios. So please understand that regarding information related to their new titles, it will be relayed by the studios themselves. And as was disclosed on November 7, Black Clover is expected to be released within the first half of next year. And regarding Black Clover, we are recognizing them in an equity method. But regarding our contract with them, we do not have any call options with them. It was answered by our CFO, Seok Cho.

[Foreign Language] The following question will be presented by Jong Hwa Sung from eBest Investment and Securities.

[Foreign Language]

[Interpreted] Thank you for the opportunity. I have several questions. My first question is we have seen a rise for EIP better IP in PC. So do you think that it was because of a one-off event? Or do you think that it attests to your structural fundamentals that have been strengthened? And can you give us your guidance for Q4 sales related to expenses, you mentioned that the reason behind your expense cut for labor was mostly due to the internship that was completed. However, for Q2, do you think that you will have a similar level of labor expenses when you exclude the one-off in one-offs? And can you tell us about what will happen going forward? Or do you think that it will go down? And can you give us a structural pace on the Q3 and do you think it will continue? And it seems that for your sales, they have bought off, but your commissions have gone down. So can you give us a breakdown behind that? Is it because your mix is more efficient now? Is it because your profits have improved. Do you think that your commissions will be at a similar level if your sales are at a similar level to Q3 the previous quarter. So it seems that also for your marketing cost, it has posted a shy of KRW 10 billion. So do you think that if it is similar to Q1 or Q3, do you think structurally, your marketing expenses will remain within that range going forward?

[Foreign Language]

[Interpreted] I would like to explain about the sales trend for Black Desert Q3 and EVE Q3 and Q4. Regarding the operating revenue for Black bettered in Q3, it has shown very good traffic and sales in most of the regions and has risen 12% Q-o-Q. In particular, we had off-line events that actually took place in a long time, and we had diverse events such as interviews with developers and large-scale updates. So through these diverse events meeting the expectations of our users, we were able to have very good responses. And because we have had very prolonged service, and this is becoming very advanced. We have been making many efforts to grow our sales. And in our case, where we have a lot of the IPs that are having the profits from overseas, we can have an FX gain effect. So it is being very beneficial to us in this respect.

[Foreign Language]

[Interpreted] Next, I would like to answer your question regarding expenses. I would like to answer your question about labor expenses. And regarding the decrease of our number of employees, as I mentioned, we completed our internship program in the first half of this year. So that led to the reduction of the numbers of employees. And in the latter half of this year, we also are expecting to have another internship program that can push up the number of our employees a bit. But internally, we are expecting to have a conservative HR-related policy. Next, I would like to explain about marketing expenses. Because Black Desert Online and EVE online have been around for a long time, we have been accumulating many experiences with the passage of time. And internally, we have been making many studies to find out what is the most efficient marketing method, and we plan to carry out conservative marketing going forward. I would lastly like to cover commissions related question that you asked. For commissions, actually, we can break it down into 2 parts: first is platform and PG-related commissions; and second is commissions and fees for the cloud server that we're using. And regarding the fact that we did not have a great increase of PG commissions related to our sales increase or revenue increase was because most of them spend from our online. And it is because as you're probably well aware, mobile game-related platform commissions are much higher than the platform commission rate for online game. And for our server-related commissions, we have been using cloud service, and we have been making many efforts and consultations to have more efficient commissions and expenses related to cloud service and making many efforts to make them minimal as possible. And we believe that in Q3, it really showcases the efforts we have been making to push down our server commissions, but we believe that there is a possibility that it might go up slightly for server commissions in Q4. It was answered by our CEO, Kyeong-In Jung; and our CFO, Seok Cho.

[Foreign Language] It seems that there are no other questions in the queue. With this, we will complete 2022 Q3 Pearl Abyss earnings conference call. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]