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 will begin the Conference Call of the Fiscal Year 2022 Fourth Quarter Earnings Results by Pearl Abyss. [Operator Instructions] Now, we shall commence the presentation on the Fiscal Year 2022 Fourth Quarter Earnings Results by Pearl Abyss.

[Interpreted] Greetings. First of all, I would like to express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2022 Q4 and full year 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, Heo Jin-Young; 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 will cover 2022 major business activities and achievements. In 2022, while strengthening the existing IP life cycle, we focused on developing new IP and concentrated on securing our future growth engines. Thanks to these efforts, despite the difficulties caused by the COVID pandemic in 2022, Black Desert and EVE sales were able to maintain the previous year's level. In addition, as the Crimson Desert showed remarkable development achievements since last summer, we have been conducting demos and marketing for B2Bs and have been getting ready for the launch. Next, I would like to talk about Q4 major business activities and achievements. Black Desert, celebrating the end of the year with Q4, further strengthened user communication. In particular, we wanted to meet more global users, not just limited to Korean users and held various events in major service countries. Beginning with the off-line user event in Taiwan in November, in December, we held a Calpheon Ball in L.A. and held the Voice of Adventurers event in Amsterdam and Tokyo and expanded user kinship. In addition, at the ball, we had disclosed the recently updated twin classes, Maegu and Woosa and disclosed future plans, such as the Land of the Morning Light. In particular, thanks to the Woosa effect, which was launched in December, new and returning online users significantly increased by 330% and 430%, respectively, compared to the previous month and has led to formidable results. In addition to this, with Abyss One, the Magnus update, we were able to lower the entry barrier for new users and to improve the playing environment. For consoles, we updated the Woosa class and we were able to confirm a rebound in user indicators. For mobile, we disclosed Great Desert: Shahzad, which adjusted the difficulty of the desert and introduced a new class, Maegu. In particular, after the Maegu update, the December user index improved in all regions and we could confirm that user trends also improved. EVE online through the Uprising expansion pack introduced a new type of warfare. With an interesting storyline added to a new combat system, we worked hard to give users a unique experience. In addition, an event for North American users was held in Las Vegas and we had a valuable time sharing opinions with users such as sharing future road maps. Black Desert and EVE with steady communication with users and fresh content was able to continue great performance in 2022. Going forward, we will continue to listen to the stories of our users and provide fun and fresh games. Next, I will cover our 2022 fiscal year annual and Q4 results. 2022 operating revenue posted KRW 386 billion and operating profit posted KRW 16.6 billion and both decreased 4.4% and 61.4%, respectively, Y-o-Y, and net profit posted minus KRW 41.1 billion and turned to loss. Q4 operating revenue posted KRW 103.2 billion, up 6.1% Q-o-Q and operating profit posted KRW 3.6 billion, down 70% Q-o-Q. Net profit posted minus KRW 100.3 billion and due to FX-related loss and intangible asset impairment losses, it turned to a loss Q-o-Q. Next, I will cover the operating revenue in more detail. First, I will explain the operating revenue by major IP. The operating revenue generated from Black Desert IP for the quarter was KRW 71.2 billion and decreased 7% Q-o-Q. EVE IP operating revenue posted KRW 17.6 billion, down 9.3% Q-o-Q. In the case of operating revenue by region, Korea reported 19%, Asia 25% and North America-Europe, 56%. In the case of operating revenue by platform, 77% PC, 16% mobile and 7% console and maintained the level of the previous quarter. Next, I will cover operating expenses. Q4 operating expenses posted KRW 99.6 billion, up 16.7% Q-o-Q. For labor cost, it recorded KRW 42.9 billion, up 4.9% Q-o-Q. For your reference, as of the end of Q4, there is 1,452 head count. There are 905 developers, which is 62% of the total headcount. In case of commissions, it increased by 19.8% Q-o-Q, posting KRW 19.9 billion. In case of advertising expenses, with the new update and large-scale user events held in December, it increased 35.2% Q-o-Q and posted KRW 12.7 billion. Last but not least, I would like to cover 2023, Q1 major highlights. We have been showcasing steady live service of Black Desert and EVE and we will do our best to prepare for new IP. Black Desert in Q1 will also introduce a variety of new content. Recently, in January, Black Desert released Twin Class Maegu following the Twin Class Woosa introduced last month. As a class with Korean inspiration, we are seeing continued positive responses from domestic and overseas users. In addition, we will soon update a new zone, Land of Morning Light with a motif from the Joseon dynasty. We plan to showcase various contents based on various folk tales and legends that have been passed down in Korea. Mobile recently launched a new class, Woosa, with spectacular skills and action. Positive user reviews are continuing. And in addition, we plan to further increase our contact points with global users in Q1. In North America and Europe, we will hold meet-and-greet events to celebrate the seventh anniversary of service and we plan to deepen our relationship with our users. EVE celebrates its 20th anniversary this year, and we are establishing a long-term road map aiming for service of more than 30 years. In particular, so that users can enjoy the game more comfortably following the addition of Spanish language in the last quarter, we plan to add a simplified Chinese in Q1. In addition, by providing training programs and packages for new users, we plan to create an environment where new users can also settle into the game. I will now explain about the progress of our new IP. We are focusing on developing Crimson Desert with the goal of completing development in the second half of the year. In addition, we are preparing for various types of marketing according to the progress of our development. So, once the schedule is confirmed, we will let you know. A lot of time has passed since we showed footage of Crimson Desert at G-Star in 2019 and TGA in 2020. As many people have been waiting for a long time, in order to repay you with the best quality possible, the Crimson Desert team is doing their best until the end of development. During the remaining time, we will do our best to improve the quality of development and thoroughly make preparations to have a successful launch. To be a better company, all employees from the CEO are doing their best. We ask for your continued interest and support. Thank you very much. With this, we will conclude the Pearl Abyss 2022 full year and Q4 earnings release and start the Q&A session.

[Interpreted] Now, Q&A session will begin. [Operator Instructions] The first question will be provided by Jingu Kim from Kiwoom Securities.

[Interpreted] I have 2 questions. My first question is about when will you be ready to show us more in-game footage of Crimson Desert and DokeV? And can you tell us about the progress of DokeV so far? My second question is about your business related to AI. And can you tell us about any status or progress? And do you think that you can actually apply that to your engine to have more synergy? Or do you think that it can reduce your time for development or have development efficiencies? And how can it be applied to your business strategies?

[Interpreted] Thank you for your questions. I would like to update on the current progress for Crimson Desert and DokeV as you asked. Currently for Crimson Desert, we have the goal of completing the development by second half of this year. So, we are completely committed to development. And currently, we are in the stage of doing different work and test in order to have more completeness of the game. In addition, we are actually consulting with many partners for pre-marketing preparation. And currently, we are pondering upon which would be the best direction for the company that can benefit the company out of the many proposals. Related to this, we will first make an internal decision. And after we have disclosure of more in-game footage, then we will have more strengthened marketing activities. In the case of DokeV through the Blackspace Engine, we are currently getting sharing of all the resources and environment that is being developed for Crimson Desert. So, our development efficiency is heightening. Also, our DokeV development team is doing their best to show a better developed version of the game. However, because we are going to commit ourselves to marketing of Crimson Desert this year, I would like for your kind understanding that regarding when we will be able to disclose more in-game footage of DokeV, while it will be very hard to give you a fixed answer at this point. And I know that there is very heightened interest in AI and that is why you probably asked the question. As you probably know, with the development of recent technologies, we are seeing more games developed using AI and we are seeing more of the service areas expanding and our company is also very interested in this trend as well. In our case, although we have not been focusing on training and development of large-scale models such as ChatGPT, we have been interested in generative models that have been showing great success and we have been engaging in R&D in this area so far. We have been utilizing AI technology for a dialogue between the characters within the game or to help communication between the users that use different languages. In addition, we have been actually integrating AI technology to our unique engine so that we can provide higher quality games more rapidly to more users, which is the goal and have been increasing our development efficiency. For example, we have our engine atmosphere processing technology. And what they do is not individually processed the different atmospheric phenomenon one by one, but they can actually at one time, process all the different items that are needed to express the atmosphere, such as sky, sun, mist and rain and they can express it at once. In addition, we have automation of geometry and physics technology. So, when there are large scale placement of entities in the game, you don't have to place individual entities, but you can simply have large-scale configuration by just setting an area. Likewise, through our unique engine, we have had development automation in many areas and these are helping us very rapidly develop the game with high-quality graphics.

[Interpreted] It was our CEO, Heo Jin-Young, who answered your questions. We will take the next question. The following question will be presented by Stanley Yang from JPMorgan.

[Interpreted] I have 2 questions about Crimson Desert. Can you tell us what is the biggest difference between the trailer that you showed us for gameplay 2 years ago to the current version? And do you have any changes to the business model since then? Second question is about the development delay of Crimson Desert, but despite the delay, it seems that management still has very high expectations for Crimson Desert and you are anticipating it to be a global hit. So, can you tell us more specifically about why do you think Crimson Desert will be a hit globally?