Wemade Co.,Ltd. (A112040) Earnings Call Transcript & Summary

[Interpreted] Good morning. This is [ Jim Lim ] of the IR Department at Wemade. Thank you for joining our earnings conference call. On today's call, we also have our CEO, Henry Chang; our Head of IR, Sang-Won Kim; and Director, Hong-Rae Cho of the Finance Department. We will start with opening remarks by CEO, Henry Chang, followed by a presentation on fourth quarter and full year results by Sang-Won Kim before taking your questions. The 2019 fourth quarter and full year results presented today have not yet been completely audited by an external auditor and may change during the auditing process. We also remind you to refer to the disclaimer included in the fourth quarter and full year earnings presentation material posted on our website. Now our CEO, Chang, will make some opening remarks.

[Interpreted] Well, good morning. This is Henry Chang of Wemade. Thank you for joining our fourth quarter earnings conference call. Because the detailed quarterly results will be addressed during the following presentation and the Q&A, as my opening comments, I would like to focus on some key business topics. Last December, Wemade received several decisions in its favor from the Chinese courts regarding games such as Rexue Chuanqi and Chuanqibaye mobile. Also after completing all hearing procedures for key cases, including the Singapore arbitration against Shanda, the appeal filed by 37 games for Chuanqibaye, reinforcement of the Arbitral award against Kingnet and ZHNT and the arbitration against Jiu Ling, which is a Kingnet subsidiary for ChuanQi Lai Le and launching Chuanqi we are waiting for decisions from the respective courts and tribunals. In particular, in the appeal by 37 games for Chuanqibaye their procedures took a bit longer than expected due to the reconciliation process led by the court, but we expect the process to come to an end soon. Regarding the enforcement of the Arbitral award against Kingnet and ZHNT, the Arbitral award has been enforced against ZHNT already and the process to add Kingnet's joint and several liability is moving on smoothly. The process is taking a bit more time than expected, given that this is the first time, but we do not expect any surprises and the experience gained in enforcing arbitrations in China will be valuable in the future. Even though the Shanghai IT court has already issued a decision to suspend the extended -- actual Shanda SLA and also determine the scope of the license agreement is on top of that, the Singapore arbitration also finds that the scope of the SLA is limited to PC client games, Shanda will have no grounds at all to interfere with Wemade Licensing business any further. Therefore, not only the existing licensing business, but also our joint venture plans regarding the ChuanQi store are expected to gain even more momentum with the arbitration decision. At the same time, we are also focusing on putting the finishing touches on the development of our Mir trilogy and will communicate with the market the test and open schedules once they are finalized. We are preparing for not only the train service, but also several ways of responding flexibly to the Chinese market. Also, we are planning the global launch of ChuanQi H5 for WEMIX, which combines our mid- IP with the blockchain gate platform that we have. Regarding our dividend for fiscal year 2019, we're planning to pay out KRW 10 billion as dividend according to our existing dividend policy, and we will work harder to provide greater shareholder return this year. The year 2020 is an important year. It marks the 20th anniversary of Wemade. And looking back, during the past 2 decades, we had the honor of The Legend of Mir to becoming the #1 game IP in the largest game market, but also went through numerous disputes over the IP. The challenging vision for Wemade for the next 20 years is to put an end to these disputes and to create the business and the earnings that correspond to our market and IP. We will continue our steady march towards becoming the world's #1 game IP company. Thank you.

[Interpreted] Good morning. This is Sang-Won Kim, Head of IR at Wemade. I would like to go over the major business results for fourth quarter and share some updates and plans for first quarter 2020. Well, 2019 was a year when our efforts to protect the Mir IP made meaningful progress and achievements. During the fourth quarter, Shanghai Pudong People's Court in China ruled in our favor regarding infringement of the Mir IP copyright by mobile game Chuanqibaye developed by 37 games and published by Tencent. Also in the same court, we also won in the case regarding infringement of the Mir IP copyright by Won the ChuanQi which is a mobile game developed by Kingnet and published by Tencent. Also in the copyright infringement case filed against Wemade by Actoz Soft regarding the Chinese games Chi ChuanQi, mobile game ChuanQi Lai Le, and HTML5 game Chi ChuanQi, we received a decision in our favor that reaffirmed our legitimate rights as the copyright holder. With regard to the Mir IP copyright infringement arbitration against Shanda games currently pending in the Singapore International Arbitration court. That case is scheduled to be carried out in 2 phases. That is the first award to be delivered regarding whether the Mir IP copyright has been infringed, followed by a second award regarding the compensation for damages according to such copyright infringement. We expect to receive the first arbitral award in writing in the near future. And as the legitimate copyright holder of the Mir IP, we expect to hear positive news. We also anticipate that this arbitral award regarding IP infringement will bring greater clarity to the Mir IP copyright relationship in China, which will open the door further for us to accelerate the expansion of our licensing business. Regarding the Mir IP copyright infringement lawsuit against 37 games regarding the web game Chuanqibaye after winning the first instance trial in the Beijing IP court on December 28, 2018, we're expecting to receive the court decision on the final appeal soon. Once the final appeal decision is delivered, we plan to move towards a new licensing agreement with 37 games, including for the web game Chuanqibaye. Regarding the arbitration against Kingnet for the nonperformance of the Mir IP licensing agreement. After obtaining a decision in our favor from the Singapore International Arbitration court on May 22, 2019, we are currently continuing the force enforcement procedures through Chinese courts. We expect the enforcement procedures to be completed in the near future and to collect the compensation for damages according to the Arbitral award. We're also currently in the process of carrying out arbitrations against Jiu Ling, which is a Kingnet subsidiary for nonperformance of the Mir IP licensing agreement and payments of loyalties regarding the games ChuanQi Lai Le and [indiscernible] respectively, through the Singapore International Arbitration court and the Korean Commercial Arbitration board. Regarding these cases, we are also expecting to receive the arbitral award in writing in the near future and anticipate a positive outcome. Meanwhile, we are, at the same time, pursuing the ChuanQi game platform joint venture business in order to further expand the Mir IP licensing business in China and to improve the efficiency and effectiveness of freeing copyright infringing games under an official licensing program. The platform business, which is tentatively lane at the ChuanQi store is currently engaged in negotiations to select the most optimal partner, and we will keep the market updated regarding major development. In January last month, Wemade Tree, which is a subsidiary that is consolidated on to our financials, launch the blockchain game platform, WEMIX. The platform is currently conducting long-term promotions, which will be followed by a release of new games, including CrypTornado for WEMIX, which is an in-house developed blockchain-based game as well as ChuanQi H5 for WEMIX, which is based on the Mir IP. Wemade Tree will provide user-friendly blockchain-based game services through WEMIX, through the WEMIX platform. Also FLERO Games, which is another subsidiary that is included in our consolidation, carried out the global launch of Abyssrium in fall, which is a new mobile game based on the Abyssrium IP on January 8, 2020. We're also pushing ahead with the development of the Mir trilogy consisting of Mir 4, Mir W and Mir M. Mir 4, which is a mobile MMORPG is preparing for launch in Korea with a full range of prelaunch testing plans. Mir W, which is a strategy simulation game; and Mir M, which is a mobile MMORPG that faithfully restores the original legend of Mir 2 PC game are being developed targeting launch in Korea within the year. Next is our tentative 2019 fourth quarter consolidated results. First fourth quarter revenue was KRW 24.1 billion, which is a 17% Q-on-Q decrease and a 26% year-on-year decrease due to factors such as delay in the launch of new licensing games. Operating expense decreased by 7% quarter-on-quarter, thanks to decrease in labor costs as well as commission expenses by 2% and 14%, respectively, versus the third quarter. As a result, in the fourth quarter, we recorded an operating loss of KRW 2.7 billion. Net loss was KRW 18.8 billion after foreign currency -- foreign exchange conversion loss and corporate tax expenses. Next is our tentative results for full year 2019. Our 2019 full year revenue was KRW 113.6 billion, which is an 11% decrease year-on-year, mainly due to delay in the launch of major licensing games and also the soft revenue of existing licensing games and mobile games. Our operating expense for 2019 decreased by 26% year-on-year. And in 2019 full year, we recorded an operating loss of KRW 6.9 billion. Net loss for full year 2019 was KRW 26.6 billion, mainly due to foreign currency conversion loss and corporate tax expenses. Next is some details about our fourth quarter revenue and operating expenses. In terms of revenue breakdown by platform, license revenue and by region, licensing revenue in the fourth quarter was KRW 11.3 billion, which is a 29% decrease quarter-on-quarter, mainly due to the delay in the launch of new licensing games. For mobile games, revenue in fourth quarter was KRW 8.5 billion, which is a slight increase quarter-on-quarter due to factors, including the update of existing mobile games. Online game revenue in fourth quarter was KRW 4.7 billion, which is an increase by 5% quarter-on-quarter and 11% year-on-year. Thanks to new server opens and also promotional events for existing games. In terms of regional breakdown, domestic revenue was KRW 10.5 billion, which is a slight decrease quarter-on-quarter, mainly due to steady decrease of revenue from existing games. Overseas revenue was KRW 13.7 billion, which is a 25% quarter-on-quarter decrease, reflecting the delay in launch of new licensing games. Next about the operating expenses. In fourth quarter, consolidated basis, operating expense was KRW 26.8 billion, which is a decrease of 7% quarter-on-quarter and decrease of 63% year-on-year, including labor costs and commission expenses decreasing by 2% and 14%, respectively. This ends the presentation on our fourth quarter and full year tentative results for 2019, and now we will take your questions.

[Operator Instructions] [Interpreted] The first question will be provided by [indiscernible] Securities.

[Interpreted] My question is regarding the licensing revenue. I did notice that your licensing game revenue -- licensing revenue in the fourth quarter of 2019 decreased quite significantly. As guidance the company had previously mentioned that it expects 4 to 5 new licensing games to be released each quarter. Do you think given the fourth quarter results, that pace would be maintained throughout 2020?

[Interpreted] The reason why the fourth quarter licensing revenue was less than expected is because many of the new games that we had expected to be released were not released during the fourth quarter. The general practice in the Chinese market is for Chinese game companies to first test the games in the market and only officially release the games that actually pass a certain level. And that's why we believe that the games that were not released in the fourth quarter or those that are scheduled for lease in the first and second quarter of this year will be eventually released on a consecutive basis.

[Interpreted] The next question will be presented by Moonjong Lee from Shinhan Investments.

[Interpreted] My question is regarding the 37 games litigation. You said one of the reasons why the final appeal decision on that dispute is taking longer than expected is because of a court led reconciliation process. I'm wondering what the companies, the 2 parties have been discussing, for example, do the 2 parties have, for example, a tentative list of the games that would be included if the parties move on to an official licensing agreement after the delivery of the final field decision. Also regarding the back licensing pay for the existing service of the Chuanqibaye would Wemade have to go through a separate, for example, damages claim to collect the back pay or is payment of that back pay for the previous Chuanqibaye service also part of the negotiation and agreement?