Pearl Abyss Corp. (A263750) Earnings Call Transcript & Summary

Good morning and good evening. Thank you all for joining the conference call for the earnings results of Pearl Abyss. This conference will start with the presentation followed by a Q&A session. [Operator Instructions]. Now we will begin the presentation on Pearl Abyss' second quarter earnings results of the fiscal year 2024.

[Interpreted] Greetings, I am Kim [indiscernible] from Pearl Abyss IR team. First of all, I express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2024 Q2 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 at 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. I would like to cover Q2 major business highlights and performance. Black Desert and EVE, thanks to our accumulated live service know-how, continued consistent performance and test for new services, including Black Desert China and Project Awakening were carried out. Black Desert celebrating 10 years of service Heidel Ball in Beynac, France, a real city, which appears in Heidel. Around 200 players gathered and enjoyed diverse events and use about second half major updates, including for Land of the Morning light: Seoul was announced. In addition, at the ball update on episodes during the past 10 years were shared and participants expressed high satisfaction and positive responses, thanks to our close attention paid to even the smallest details of user feedback. Other than this, in Q2, Guild War content's Siege War and Ancient Anvil was updated to offer a pleasant game-playing environment. In case of mobile, Askeia Class was launched and new server Oasis was added, and we worked hard to provide a better game playing environment and content. For EVE Online, a new expansion pack, EQUINOX was launched with a new narrative and stable performance continued. In particular, through this expansion pack, Sandbox experience was expanded, including new tools that enable you to make your own spaceships, which allowed you to more strengthen your user identity. In addition, EVE Vanguard showcased the second new map, Solstice so that users can directly participate in the game before official launching, enabling them to experience major improvements and system changes. Apart from this, we thoroughly prepared for new services to expand our revenues. First of all, in case of Black Desert China, after the Chinese game license was issued in June, we recently carried out technology test for smooth service. We also carried out the play test for a Project Awakening, a blockchain-based project, and we have the second soft launching based on the first soft launching feedback for our mobile strategy game EVE Galaxy Conquest, and we are doing our utmost to prepare for its launching. Next, I will cover Q2 performance. Q2 operating revenue posted KRW 81.8 billion, a 4.2% drop Q-o-Q, operating loss recorded KRW 5.8 billion turning a loss and net profit posted KRW 9.1 billion, a 28.9% drop Q-o-Q. I will now cover operating revenue in more detail. First, the operating revenue for major IPs. Black Desert IP operating revenue for this quarter posted [ KRW 60 billion, ] a 10.2% drop Q-o-Q. EVE IP operating revenue posted KRW 21.6 billion, a 20% growth Q-o-Q. In case of operating revenue for regions, domestic was 18%, Asia was 26% and North America and Europe posted 56%. In case of operating revenue for platforms, 75% was for PC, 21% for mobile and 4% for console. Next, I will cover operating expenses. Q2 operating expenses increased 3.2% Q-o-Q and posted KRW 87.6 billion. In case of labor expenses, it posted KRW 45.7 billion, a 0.6% drop Q-o-Q. For your reference, as of end Q2, the headcount is 1,331. There are 759 developers among them, which is 57% of the total headcount. In case of commissions, it posted KRW 18.4 billion, a 7.7% increase Q-o-Q. In case of advertising expenses, with Heidel ball, which was held in Q2, it posted KRW 7.3 billion, a 29.3% increase Q-o-Q. Last, I will cover Q3 major highlights. In Q3, Black Desert celebrating its 10-year anniversary, is preparing content full of more interesting adventures. First, we updated Land of the Morning light: Seoul, which had the Joseon representative areas as it motif to the Korea server yesterday. Land of the Morning light has a background of old Seoul, including places such as Gyeongbok Palace and Gyeonghoeru and has updated unique Korean characters like Janghwa, Hongryeon and Bulgasal and will showcase exciting stories. We plan to update Land of the Morning light: Seoul to the global server in autumn. In addition, we launched the Dosa Class with Unique Korean characteristics in July and received positive responses from users. In particular, since Dosa Class was designed to meet the land of morning light concept, swordsmanship and Taoism is used by the character, showing the unique style of Joseon. In the case of Black Desert console, along with continuous content improvement, there was a recent update of a Mountain Of Eternal Winter. In order to create a better quality and game-playing environment for users, we are accelerating next-generation device version development as well. In case of mobile, Dosa Class was launched in July, and we will soon showcase Azunak War, new survival content combining PvP and PvE. Black Desert China, after acquiring Chinese game license in June is thoroughly preparing for its launching. In July, large-scale technology tests were carried out, and there was a service inspection process and through participating in ChinaJoy, the biggest game event in China, user expectations were heightened. EVE will also showcase diverse content. In particular, there will be an alliance tournament where the best members of each alliance will be in combat, which will make the game more fun. EVE Vanguard based on the test of the previous quarter, is continuously making improvements to the game. We will do our best until the end so that we can provide a richer FPS experience until launching and strengthen the EVE ecosystem. We are also smoothly making preparations for our new titles to secure our new growth engines. First, in the case of Project Awakening, an IP-based blockchain platform, we will carry out the second test so that we can perfect the details of the game. In the case of EVE Galaxy Quest, while adding to the front of the game by adding new server and content, we will begin pre reservations for the official launching. In the case of Crimson Desert, we will participate in diverse game events in the second half to actively promote the game. At Gamescom, which will take place in 2 weeks, we are planning to have B2C demos where users can directly play the game. We are preparing for demo events so that we can sufficiently satisfy the heightened expectations of many people, and we will look forward to your keen interest. After first disclosing Crimson Desert in 2019 by our company, we have been making challenges to the AAA market and went through many trials and errors. However, we can now say that Crimson Desert's quality and gameability goes beyond the currently existing open world games, making the around 7 years of development worth the time. Currently, since we are at the stage when the game is being completed, starting with Gamescom, we will now focus on marketing. We will make thorough preparations so that using our accumulated know-how, it can lead to successful launching. To be a better company, all employees from the CEO are doing our best. We ask for your continued interest and support. Thank you for your attention. With this, we will conclude the Pearl Abyss 2024 Q2 earnings release and start the Q&A session.

[Interpreted] [Operator Instructions] The first question will be presented by Dan Kim from Morgan Stanley.

[Interpreted] Thank you very much for this opportunity, and I have 3 questions. The questions are related to Black Desert China, EVE and second half -- and related to the second half outlook for your operational losses or profits. So actually, my first question is about your user feedback you got for Black Desert China. Can you tell us more about the feedback you got? And can you also give us any of your information related to when it will be launched? Do you think it will be launched within the end of this year? Or can you give us more color to the launching date? The second question is related to EVE IP. And I think we can see that your revenues have been growing for EVE IP that was quite pronounced. So do you think this trend will continue? Or do you think there will be a downward stabilization of the EVE IP revenues of below KRW 20 billion in the future? The third question is about your operating expenses. It seems to me that it will be quite challenging for you to have more efficiency in your operating expenses. So there might be some more room for operating losses going forward. So can you give us your guideline for operating profits or losses in the second half of the year or further after that?

[Interpreted] First of all, I would like to answer your question about Black Desert China service. For Black Desert China service, after the Chinese game license was issued in June, we have had the technology test in July, and we participated in China's biggest game event, ChinaJoy and has been heightening our marketing. And at ChinaJoy, we had many users visiting us, and we could find out that people had very high expectations about our game. In addition, we had completed well our technology test as of yesterday. And regarding the launching, as was announced by the publisher, we believe that it will be possible within the second half of this year. And taking into consideration the last optimization work and the schedule of the launching of our competing titles, we have some plans that we will probably have a very fast launching after the Chinese holidays of Chinese Thanksgiving.

[Interpreted] I would like to answer your second question about EVE IP revenue. For EVE, with the launching of EQUINOX, the expansion pack that was launched in Q2 had very good performance. And for EVE, we always plan our twice-a-year expansion pack launching. Of course, depending on the different timing, for example, of the expansion packs or seasonality factors, there could be some ups and downs. But as you've mentioned, regarding the KRW 20 billion or so of revenue level for EVE, we plan to actually maintain that level. And it is true that our user base has been positively affected with the linkage to EVE Vanguard and with the expansion packs. So we will work very hard for us to maintain our revenue level.

[Interpreted] I would like to answer your third question about making our operational expenses more efficient. We are working very hard to have cost savings of our expenses, and that is currently ongoing as well. We are actually expanding our use of machine learning and AI in terms of development and our labor cost burden is going down. And regarding live services, we are also trying to have more of its transition to AI as well. And we are trying very hard to cut our costs and expenses by making some services internalized and outsourcing some of them when it is more efficient. And despite all of these efforts, they are being -- we are having an operating loss because according to our accounting standard regarding the expenses that go into the development of our new titles, it is not being yet capitalized, and it is actually being posted on our account as our expenses. So that is why regarding these expenses, even after the launching and when we have higher revenues, we believe that there will not be a great change. And we believe that our earnings will improve in the second half with more revenues that are going to be -- come into being through the launching.

[Interpreted] The answers were provided by our CBO, Gyeong Kim; CEO, Heo Jin-Young; and CFO, Cho Seok Woo. We will take the next question. Your next question will be presented by Jin-Gu Kim from Kiwoom Securities.

[Interpreted] Can you tell us more about what is the degree of completion of Crimson Desert? And how much more of remaining development is still there? And can you tell us about to what extent are you going to disclose Crimson Desert at Gamescom and what is its differentiating point? And can you tell us that with the launching of Crimson Desert, what is the direction that your company aims to go towards?

[Interpreted] Thank you very much for your questions. For Crimson Desert, we are actually heightening the degree of completion and optimization, and we are smoothly engaging in the last minute stages. And since we are nearing the completion of the development, starting off with Gamescom, we will do our best to actually promote our game in earnest and have plans to heighten our degree of marketing. First of all, at Gamescom, which will take place in 2 weeks, we are preparing for a 30-minute portion of our demo build where users can directly play the game. Last year, what we did was actually show a three-minute video or trailer at ONL, which is the night event of the Gamescom and concentrate on marketing with our partner companies. However, for this year, what we're preparing for is the user demo that I aforementioned as well as about a one-hour long, our demo video or trailers. So I believe that you will get a chance to see this through our own channels and through media. We will do our best so that the users at the Gamescom will play the game. And even for the users that are not there, we will do our best so that they can actually get a taste of Crimson Desert through videos. Also after Gamescom, we want Korean users to also experience the game. So we are planning to have B2C demos at G-STAR in Korea in November as well. And related to the differentiating aspects of Crimson Desert, Crimson Desert will actually show a very high degree of leeway, which will overcome the different open world games that have existed so far. And we have been working hard so that we can show off game quality that is of a higher level compared to others. In addition, we have very immersive stories and graphics and the degree of completeness is very high. So we are making many efforts, and we believe the results will actually rival that of other AAA games or higher. And we are committed to actually heightening the degree of completeness or perfection of the game playing until the end of our preparation phase right before our launching and strengthen our marketing so that we will do our best for the best performance of the game.

[Interpreted] The answer was provided by our CEO, Heo Jin-Young; We will take the next question. The next question will be presented by Jae-min Ahn from NH Investment & Securities.

[Interpreted] Thank you for the opportunity. I am Jae-min from NH Investment Securities. And I know that you can't exactly pinpoint when exactly the date of when Crimson Desert will be launched, but do you think that it will be similar to the same time next year in the summertime of next year? And my second question is that, are you considering signing contracts with large-scale global publishers like Sony, Microsoft or Tencent? Are you in negotiation with any of them?

[Interpreted] Well, regarding our launching schedule, since we are smoothly completing the game, I think that regarding when we will launch the game, the visibility is getting clearer and clearer. However, at this Gamescom, we will focus on user marketing. And regarding the more detailed launching date announcement, we will communicate this more to you in the process of our marketing, which will be done in the second half of this year. And we do know that it's very important for us to have a launching as soon as possible. So all of our developers are doing their best. So we will do our utmost to complete the perfection of our game as soon as possible so that we can complete the development and prepare for launching as soon as possible as well. In the case of publishing, well, we thought of many different ways of publishing. However, since we are considering the benefit of our company as our first priority, including having simultaneous launching with PC version, we are now thinking of a direction where we will directly service. Since we have been directly servicing Black Desert in all different global areas for the last 10 years and accumulating marketing capability and know-how, we have the confidence that we can successfully service Crimson Desert as well. Actually, during the last few years at Gamescom and other global events, we were able to successfully promote Crimson Desert and get huge interest from users. Going forward, we will utilize the accumulated know-how and make thorough preparations that Crimson Desert can get the right results that will be fit its status as a AAA game.

[Interpreted] The answer was provided by our CEO, Heo Jin-Young. [Operator Instructions] It seems that there are no other questions in the queue. And with this, we will conclude Pearl Abyss 2024 Q2 earnings results 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.]