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

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of our fiscal year 2022 fourth quarter earnings results by Wemade, Wemade Max and Wemade Play. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2022 fourth quarter earnings results by Wemade, Wemade Max and Wemade Play. Thank you for joining the 2022 fourth quarter and annual earnings call of Wemade, Wemade Max and Wemade Play. We have with us CEO, Henry Chang of Wemade; CEO [indiscernible] of Wemade Play; and Senior Managing Director, Sang-Won Kim, of Strategic Communications Division. We'll start with the opening remarks by Wemade CEO, Henry Chang, and the presentation of Q4 and annual results by Senior Managing Director, Sang-Won Kim, which will be followed by a Q&A session. Q4 quarterly results and the annual results of 2022 are prepared and provided for the convenience of the investors without completing external auditor's review. They are subject to change as per accounting audit and instructions from the Financial Services Commission. Please be advised to refer to the disclaimer from the Q4 and annual results presentation material posted on our website. Now CEO, Henry Chang, will give an opening address.

Hello. I am Wemade CEO, Henry Chang. Thank you for attending Wemade 2022 Q4 and Annual Earnings Conference Call. Today, I would like to talk about 3 topics: first, roll up; second anti-fragile; and transparency. In the context of blockchain, rollouts mean rolling up or compiling numerous transactions and turning them into a single data and submitting it to the mainnet. The year of 2023 will be the year when Wemade will roll up the business initiatives built so far to a greater achievement. First of all, Wemade will widen the lead as a digital economic platform. WEMIX PLAY, which is already #1, will further solidify its position as an open blockchain game platform. By launching blockchain games that will continue the legacy of success of Mir 4 and Mir M and by further advancing inter-game economy, we'll make this year the year of growth, not just in terms of [indiscernible] but also in quality. Going beyond NFT transactions of individual products, we will build a new digital economy through a protocol-based economic community of DAO. NFT, DAO platform NILE were first launched blockchain validation, [ artwork ], DeFi and database DAO and expand to include fan clubs, sports, webtoons, [indiscernible], NGOs, donation and public funds. Ultimately, all communities with varying sizes of economy operate in a more transparent and fair manner through DAO. WEMIX.Fi will broaden the spectrum of new financial services based on game tokens, NFTs and DAO that have practical utilities. Drawing on the merit of 100% reserved fully-backed stablecoin WEMIX Dollar, WEMIX.Fi will be intuitively understood and will show reliable growth. By executing buyback and burns of WEMIX on exchanges with 25% of the WEMIX platform income, we have already built the deflationary economy where increase in transaction volume pushes up the valuation of WEMIX and the total supply continuously decreases. Therefore, the success and the growth of open platforms, namely WEMIX PLAY, NILE and WEMIX.FI will lead to the growth of WEMIX. As a game content company, Wemade plans to release [ YMIR ] and other blockbuster titles following the success of Mir 4 and Mir M within this year in Korea and globally. Thanks to more sophisticated in-game and inter-game tokenomics Mir M Global's sales relative to traffic is almost tenfold of that of Mir 4. Tokenomics of WEMIX platform is still evolving and developing. Based on this, Anipang, [ social casino ] and other diverse stronger games will be launched globally. If the history of Wemade blockchain business is 5 years, that of Wemade Chinese business is 22 years. We plan to fully leverage opportunities arising with China's reopening. Soon Singapore arbitration ruling will be finalized, and we are preparing to service Mir 4 and Mir M in China. Given the importance of IP in the Chinese market, we expect the solid Mir IP-based game will bring us greater achievements. I've touched upon the business-wise roll ups for the year 2023 so far. Anti-fragile is an expression that describes the ability to not only withstand uncertainties, but rather leverage it to produce even better results. In 2022, the global financial market and crypto market environment was [indiscernible] winter, and Wemade also experienced trials and tribulations of various nature and magnitude. However, Wemade not only rose above the hardship, but turned it into an opportunity to strengthen our technology, business and management capabilities. This is aptly illustrated by where we may stand now and will be clearly proven by the business achievements and the growth of the company this year. Amid the uncertain industry dynamics where technological innovation becomes industrialized, our anti-fragile ability and characteristics will help us achieve our goals. Finally, blockchain is transparent. It is impossible to do something in secret on blockchain. However, technical transparency does not necessarily lead to practical transparency. When someone wants to know about something, he or she should be able to find that information in an easy and convenient interface. Only then practical transparency is realized. To most people, long wallet addresses and transaction history written in complicated codes and blockchain can never be transparent information. We want to make a technically transparent blockchain practically transparent as well. We aspire to create a transparent economic platform where our stakeholders can easily track and understand, for example, how the money I donated was spent, how my apartment maintenance fees are being used, where my fan club membership fees is being used, how many tickets are sold. The economy made up of interactions between participants has to be transparent and transparency of the economy will enable more reliable and sustained growth of the economy. 2022 was such a difficult year for us, but we didn't collapse, we survived. Not only that, this year, we're going to roll up what we have been building over the past few years. We will do our part in creating a better world by offering a transparent platform. Thank you.

Hello, this is Senior Managing Director, Sang-Won Kim, Head of Strategic Communications Division. I'd like to share 2 key business highlights of the fourth quarter of 2022 and updates and plans for the first quarter of '23. We are continuously working to globally expand our blockchain business. As of February 15, a total of 12 companies including global blockchain infrastructure company, BlockDaemon, have joined 40 WONDERS WEMIX 3.0 Node Council Partners or NCP, continuously contributing to the development of the WEMIX ecosystem. In December, WEMIX was listed on the Korean digital asset exchange, GDAC; and in January on the global digital asset exchange, BitMart. Today, WEMIX got listed on the Brazilian local exchange, Mercado Bitcoin. In particular, Brazil has the largest number of WEMIX PLAY users and as 1 of the largest blockchain game markets in Latin America, WEMIX platform users in Brazil can now trade WEMIX with greater convenience on the largest virtual asset exchange in Brazil. With the global expansion of the blockchain business, WEMIX management system has been further strengthened. We have linked real-time circulation data on Coinmarket cap, a leading virtual asset data service company and we are using live watch, a real-time circulation monitoring service of Xangle, a virtual asset disclosure platform. In addition, we decided to use the custody service of Binance, the world's largest virtual asset exchange. In the fourth quarter, a total of 6 new blockchain games were onboarded to the blockchain game platform WEMIX PLAY, and a total of 22 games are currently being serviced. Last November, participated in G-Star, the largest game show in Korea as a main sponsor and signed new onboarding agreements for 20 games reaching a total of 80 signed games. On January 27, we officially opened Fan Token on our blockchain game platform, WEMIX PLAY. It is a new patronage system that supports creators for purchasing and holding their tokens. The first Fan Token is MYRTLE issued by Myrtle Sarrosa, our Filipino actress and blockchain game streamer with more than 6 million global social media followers, which has reached a market capitalization of $100 million on the first day of issuance. Fan Tokens are architected to help fans and creators grow and enjoy benefits together. We expected it can replace the existing creator sponsorship system. On January 31, Mir M Global and our in-house developed blockbuster MMORPG blockchain was released in 170 countries around the world, creating an inter-game economy with preexisting Mir M Global. The peak concurrent users of Mir M Global surpassed 100,000 mark in just 6 days after the launch. The number stands at upwards of 120,000 as of February 15, with great market response. We started with 14 game servers at launch and added 18 more up until now to reach a total of 32 servers. The launch of a new MMORPG game, Night Crows to WEMIX PLAY game onboarding is also progressing smoothly. Night Crows is targeted for release in Korea in April this year. It is a blockbuster that both superb unreal engine 5-based graphics set in the medieval Europe. We are looking to start preregistration in March. New games of various genres will be onboarded to WEMIX PLAY. The MMORPG game of this legend is gearing up for release on February 16 and other games to be onboarded include Anipang Blast, a casual puzzle game using WEMIX PLAY's Anipang IP; and another Anipang IP-based, Anipang Match and Anipang Coins, a coin-master game; plus NHN Bigfoot, [indiscernible] prediction game, [indiscernible]. Next, I would like to turn to the topic of dividend decisions according to our dividend policy. As notified for yesterday's dividend decision disclosure with the gains from the partial sales of shares in LIONHEART STUDIO, we decided to pay a cash dividend with a payout ratio of 30% which is [ KRW 25.087 ] billion in total or KRW 750 per share. We'll continue to do our utmost to elevate shareholder return. Next, I'll briefly talk about Wemade's tentative Q4 and consolidated annual results. Annual revenue in 2022 stood at KRW 458.6 billion, the highest since the foundation of the company, thanks to full quarter effect of Mir 4 Global sales and the domestic launch of Mir M. Q4 revenue was KRW 110.3 billion, a Q-o-Q increase, thanks to new licensing agreements despite a natural decline in sales of previously released games. Operating expense was [ KRW 134.8 billion ], a slight decrease from the previous quarter. As a result, we posted an operating loss of KRW 24.4 billion, a reduction in the size of the loss compared to the previous quarter. Net profit or loss showed narrowing of loss Q-o-Q because of the base effect of valuation loss in financial assets at fair value that was reflected in the Q3 numbers. For more details such as sales by business units, regions, please refer to the presentation material uploaded on our website. This concludes the review of Wemade results. And I will move on to the Wemade Max Q4 and annual tentative results. As revenue from existing games like Mir 4 stabilizes, Wemade Max consolidated Q4 revenue stood at KRW 18.2 billion, an 11% decrease Q-o-Q, but a 93% increase Y-o-Y due to consolidation of Wemade Next. Operating expense increased by 9% Q-o-Q due to an increase in advertising and marketing expenses and commission fees related to the launch of new titles. This showed an uplift of 85% Y-o-Y due to [indiscernible] in the number of consolidated subsidiaries. Operating profit in Q4 was KRW 1.6 billion, which was 69% decrease Q-o-Q due to higher operating expenses but a 259% increase year-on-year. Wemade Max reported a net loss of KRW 3 billion in the fourth quarter and [ turned to ] a loss Q-o-Q due to the reflection of corporate tax expenses. Next is tentative annual results of Wemade Max. Annual revenue was KRW 86 billion, an increase of 142% Y-o-Y because of the effect of the incorporation of Wemade Next. Operating profit increased significantly from the previous to KRW 25 billion. Net income was KRW 22.2 billion, showing a turnaround to a profit-making year. That was the short briefing about Wemade Max. Now Wemade Play results. Wemade Play's consolidated Q4 revenue was KRW 32.3 billion, a 4% decrease Q-o-Q due to a natural decline in sales of [ existing ] games, but an increase of 8% Y-o-Y because of consolidation of [indiscernible] as a subsidiary. Operating expense was KRW 32.7 billion which is a similar level to the previous quarter but was 11% increase Y-o-Y due to higher labor and advertising expenses. Operating loss was KRW 500 million. Q4 was a loss-making quarter due to overall cost increase. Net income was KRW 3.8 billion. Despite gains on equity method valuation, elevated corporate tax expenses led to a 7% decrease Q-o-Q or 65% increase Y-o-Y. This concludes tentative Q4 and annual results presentation for Wemade, Wemade Max and Wemade Play. Now we'll take your questions.

[Operator Instructions] The first question will be presented by Hee-Seok Lim from Mirae Asset Securities.

The goal of Wemade Play platform onboarding was 100. Can you talk about the visibility of achievement of the goal? And can you also touch upon the annual target number for the year 2023? Second question has to do with Mir M Global sales. How -- what is the proportion of the sales of utility token relative to the entire sales?

So with the success of Mir 4 Global and with an aspiration of building an open blockchain game platform internally and externally, we have mentioned the goal of onboarding 100 games. That is because we need to reach a threshold of certain quantity to advance the platform. However, looking at what we have achieved since last year and up until this quarter, I believe it will be unlikely to reach that number. However, in the process, we have branded our platform WEMIX PLAY, and we have a great advancement in terms of back-end system and software development kit. And [indiscernible] achievement, the tokenomics for Mir M became much more sustainable and sophisticated leading to greater success and outcome. So instead of having a numerical target number, for the onboarded games, we need to now focus on the activation and the vitalization of the platform itself and the goal is aligned with that viewpoint. So we do not set any numerical target for the year 2023 because you can see the number of games onboarded almost in real-time and by a quarterly basis. You will be able to see the speed with which we onboard the games will pick up and accelerate and the number of games that will be onboarded will experience a quantum jump. So second question was about the sales contribution of utility tokens. Because the accounting method for these game tokens and utility tokens have not been streamlined yet, their sales are not reflected to the revenue. So all the numbers that you see as a Mir M sales is the income or the revenue we gained on the basis of [indiscernible] currency such as dollar. Well, we are disclosing the number of peak concurrent users on our platform, and Mir 4 was launched in August 2021 and Mir M Global was launched in January this year. Although there are some uncertainties because the month of February has not ended yet. But when you compare the September last year number for Mir M and February number for Mir M Global, the trend of Mir M Global is similar or even better than the trend shown by Mir 4 Global. So that is why I told you, we are seeing a tenfold revenue compared to the peak concurrent numbers for Mir M Global.

The next question will be presented by SeokO Kang from Shinhan Securities.

Two questions regarding the topic of the launch of Mir M and Mir 4 in China. Are you already preparing the release permit for the country? Or are you waiting the final ruling of the Singapore arbitration court? The second question is that you're pinning a lot of hopes and investing heavily and [ watching ] industry as a new growth engine. But because of that, the sizable loss is posted. So can you talk a little bit about the plan to bring efficiency or streamlining to the labor, marketing and other expenses.

So the topic of release permission is quite sensitive. So all the answer that I can give you is things are under progress underway on the topic of Chinese release. But of course, we're going to share information about the key milestones. They are threefold. First one is, any publishing agreement that we sign, that information or data will be shared; and the permit, of course, the release approval is announced by the Chinese government. So that information will be readily available; and also a third piece of information we're going to share is the timeline or the schedule of the servicing. So as these topics get confirmed and determined, we are going to consecutively release this information and share with them. So we have consecutive quarters of loss-making, but I need to clarify the specifics and details of the current situation. So the loss that we are posting is not attributable to the inefficiencies of the existing businesses. It's because of the aggressive investments that we are making. So some of which leads to a loss but it is truthfully, investment in [ due spot ]. As you would understand quite clearly, there is a significant time lag from investment to the achievement or the fruition of that investment unless we make assets out of that investment. So that is what is being manifested in our loss. Although I cannot say our existing business is efficient to the fullest to 100%, but they are quite efficient. For example, we only used marketing expenses for Mir M Global which was only KRW 2 billion at the time of the launch, which was really frugal for any game company. So the imbalance that we are seeing is not because of the inefficiency but because of the investments we are making. That might lead to a question of the investment being too excessive. The criteria to assess the adequacy of the investment can be twofold. One is the potential of the [indiscernible] the market, or the second is the robustness of the cash flow that can withstand the level of investment that we are making. So based on these 2 criteria, I don't think the investment we are making is expensive. Particularly because Mir M Global is doing so well. In my view, in this quarter or the first quarter of 2023; or on a monthly basis, this month or next month, we'll be able to [ go through ] the breakeven point and turn back into black. The biggest indicator of the performance of the investment and financial terms will be the platform revenue. And I believe the platform revenue and other performance results hit the bottom in the third quarter. And in the fourth quarter, all the numbers started to bottom out. And as per the external situation and market conditions and internal business processes and progresses, I think everything will have an upward trend starting from now. And we will be able to experience a time point when the performance will exceed and outweigh the investment that we have made.