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

[Interpreted] Good morning, and good evening. Thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2021 second quarter earnings results by Wemade and Wemade Max. 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 2021 second quarter earnings results by Wemade and Wemade Max.

[Interpreted] Good morning. This is [indiscernible] of the IR department at Wemade. Thank you for joining the second quarter joint earnings call of Wemade and Wemade Max. On today's call, we also have our CEO, Hyun-Guk Chang; and Head of IR, Sang-Won Kim. We will start with opening remarks by CEO, Hyun-Guk Chang, followed by a presentation on our second quarter results by Sang-Won Kim before taking your questions. The second quarter results presented today have not yet been completely -- have not yet completed review by the external auditor and may change during the auditing process. We also remind you to refer to the disclaimer included in the presentation material posted on our website. Now CEO, Chang, will make a few opening remarks.

[Interpreted] Thank you. This is Hyun-Guk Chang, CEO of Wemade. Thank you for joining the 2021 second quarter earnings conference call. During the last conference call, I shared the company's world view and vision regarding the transformation underway at a global scale, where games are evolving into metaverses and the value of virtual assets are being recognized. Wemade has since then continued to focus on capturing the opportunities that are created in the course of this transition. First, the global service of Mir 4, which is based on Linux and blockchain technology, is scheduled for launch within August. Black Iron, which is the most important commodity in the game, will be made into a utility point and the characters, which are the key assets for the users, will be converted into NST to create the necessary pieces for tripling a meaningful blockchain economy. CBT was carried out during the past few days with global users participating in the process of tightening the playability and stability of the service. With the global service of Mir 4, we look forward to creating the first example of the commercial success of the game evolving into a blockchain economy. Our investments in strategic alliances are also continuing to pay off. For example, ODIN by LIONHEART STUDIO has been rewriting the history of the Korean game market and is expected to be a huge hit in the larger global and Chinese markets. The company has also been carrying out investments for strategic alliance with a global virtual currency exchange, Bithumb, and also meet strategic investments into companies like UTPlus and MetaScale, which are companies developing new metaverse services. The company also launched the WEMIX NFT Auction service and has been preparing a general-purpose global NFT service as well as a DeFi, or decentralized finance services. Through various investments, alliances and service development, WEMIX continues to grow into a global virtual asset ecosystem. The revenue from the Chinese IP licensing business remains solid and the publishing agreement for games, including Mir 4, is also moving ahead smoothly. Given the rounds of policy changes for the game industry has already been completed several years ago, those involved in the Chinese game industry also say that they do not expect particular uncertainties going forward, especially for the adult game market. In line with its larger vision, Wemade will continue to establish specific strategies and execute them one by one. 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 Q2 and share some updates and plans for third quarter. In Q2, the company continued to deliver solid results supported by the continued increase in revenue from Mir 4 and the growth in license revenue. In second quarter, Mir 4 recorded KRW 100 billion in revenue cumulatively since it's launched in November 25 last year. And in the second quarter, the game continued to drive overall mobile game revenue by generating positive responses from users with major updates, including the launch of the new Crossbow Character class. On July 29, Mir 4 also started preregistration for global service. The Mir 4 global version provides call support between mobile and PC platforms and will be launched simultaneously on the PC platform team. It will be available globally in around 170 countries and in 12 languages. And will provide a new game experience to global users by incorporating blockchain-based NFT technology. Mir M, which is a new game being developed in-house based on the Mir IP is currently in its final polishing stage in time for launch in Korea within this year. On the licensing business side, revenue continued to grow for 3 consecutive quarters, thanks to the launch of new license games and the solid performance of the existing license games. With the scheduled launch of new license games and the continued conversion of private servers into license servers, we expect that license revenue will continue to grow in the second half. In the second quarter, the company saw a quantum jump in the value of its investment portfolio. The new game ODIN: Valhalla Rising, which has been a huge hit and remains the #1 group in game in Korea on major app stores since its launch, was developed by LIONHEART STUDIO, where Wemade owns a 7.2% strategic stake. In July, Wemade executed [KRW 800 billion] investment, consisting of KRW 50 billion in bonds with warrants and KRW 30 billion in convertible bonds into Vidente, which is the single largest shareholder of Bithumb, a major cryptocurrency exchange in Korea. Our strategic alliance with Vidente is expected to be a source of significant synergies in the mid to long term in connection with our blockchain-related businesses. Wemade will continue to focus on enhancing the value of its investment portfolio by continuously executing investments in the game and blockchain businesses. In June, Wemade Tree, a subsidiary that is included in our consolidated financials, opened Cryptornado for WEMIX, a blockchain game that incorporates NFT globally in 174 countries and continuing to add to its lineup of blockchain games. Also, Wemade Tree launched the WEMIX NFT Auction, which is an NFT-based auction platform, marking the start of its NFT market business. Already 2 illustrations by Kim Hyung Tae, who is the Head of SHIFTUP, and the first cut from the cartoon lineage by Eel-Suk Shin, which is the original story to the game lineage, were successfully auctioned through the WEMIX NFT Auction. WEMIX Auction is continuing to source milestone works to be actioned through its platform. And Wemade will continue to strengthen its position as a leader in the field of blockchain and metaverses. Now let's go into the second quarter tentative consolidated results of Wemade. For second quarter, revenue was KRW 68.9 billion, which is a 9% decrease quarter-on-quarter as revenue growth started to stabilize from Mir 4 and existing games. However, this is still a 175% increase on a year-on-year basis. Operating expense decreased by 13% quarter-on-quarter with large decreases in service fees as well as advertisement and marketing expenses. As a result, in second quarter, operating profit was KRW 26.9 billion, net profit KRW 18.6 billion, both turning around from the loss-making quarter last year. Overall, year-to-date, in the first half of 2021, the company has already surpassed its usual full year performance that has been recording since around 2015 in terms of revenue, operating profit and net profit. Next for some details about our second quarter revenue and operating expenses. In terms of revenue breakdown by platform and license revenue and by region. Mobile revenue was KRW 42 billion, which is a decrease quarter-on-quarter, reflecting the stabilizing trend of Mir 4 revenue growth. However, this is an increase of around 458% year-over-year. License revenue was KRW 20.2 billion, which is a 19% growth quarter-over-quarter, thanks to increase in revenue from existing license gains. PC online game revenue in second quarter was KRW 3.8 billion despite the growth of lost [indiscernible], there was a decrease in revenue from other PC online games, resulting in a decrease on a quarter-on-quarter basis. In terms of regional breakdown, domestic revenue was KRW 47.4 billion, which is a decrease quarter-on-quarter due to stabilizing Mir 4 revenue and decrease in PC online game revenue. However, this is a 458% increase year-over-year. Overseas revenue was KRW 21.5 billion, which is a 15% quarter-on-quarter increase with the increase in license game revenue from China. In terms of operating expense, second quarter consolidated fixed operating expense was KRW 42 billion, which is a 13% decrease quarter-on-quarter, reflecting decrease in service fees as well as advertisement and marketing expenses. Now that was the tentative results of Wemade. And now I would like to go over the tentative second quarter results of Wemade Max. Second quarter revenue of Wemade Max was KRW 8.3 billion, which is an 18% decrease quarter-on-quarter and 5% decrease year-over-year, reflecting factors including the decrease in revenue from existing key mobile games. Operating expense of Wemade Max was KRW 8.4 billion, which is a decrease by 13% quarter-on-quarter and 17% year-over-year due to decrease in advertisement and marketing expenses. Despite the decrease in operating expenses, Wemade Max recorded an operating loss of KRW 100 million in second quarter due to decline in revenue. On a net basis, it recorded a net loss of KRW 800 million due to increase in financial expenses. On a half year basis, Wemade Max reported a profit.

Thank you. That was the overview of our Q2 tentative results of Wemade and Wemade Max. And now we will take your questions.

[Operator Instructions] [Interpreted] The first question will be presented by Lee Moonjong from Shinhan Investment Corporation.

[Interpreted] I have a couple of questions regarding your revenue this quarter. I do notice that both the quarter-on-quarter as well as year-over-year licensing revenue is on an upward trend. Can you give us a bit more color about that? Is this mainly explained by increasing licensing revenue from existing games? Or do you think that the private servers becoming licensed is a larger factor explaining the revenue increase for your licensing business? Second question is I also noticed that your other revenue is increasing. Is this revenue coming from your new businesses? And do you think that this is more of a one-off sort of nature?

[Interpreted] So I think your first question about our licensing revenue growth, the licensing revenue growth that we see in the second quarter is mainly explained by better revenue coming in from the licensed mobile games rather than the private servers being licensed. As you know, we have entered into a partnership with Longhua Group to license these servers. But actually, that operation has not yet been put into full scale, and so it has not worked its way into our second quarter licensing revenue yet. And the other revenue, yes, that is mainly explained by growth in our new businesses, WEMIX. Even though the scale is still yet small, its businesses are becoming tangible one by one and have started to generate revenue.

The next question will be presented by Choi Jinsung from Cape Investment Securities.