Com2uSCorp

KOSDAQ:078340

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Unknown Executive]

[Foreign Language]

[Interpreted] Good morning. This is [indiscernible] of the IR Department at Com2uS. Thank you very much for joining our 2024 First Quarter Earnings Conference Call. This call will be consecutively interpreted.

On today's call, we have Com2uS' CEO, Jae-gwan Nam, Com2uS' Head of Games Business, Ji-hoon Han; Com2uS' Head of Finance, [indiscernible]; and also the Head of IR, Dongsu Kim is present.

The call will start with a presentation on our first quarter results and business update, followed by a Q&A session. The presentation materials that will be used for this call have been prepared based on K-IFRS consolidated basis, and is available on our website.

Now Head of IR at Com2uS, Dongsu Kim will start with the presentation on our first quarter results.

[Dongsu Kim, executive]

[Foreign Language]

[Interpreted] Good morning. This is Dongsu Kim, Head of IR at Com2uS. Thank you for joining our 2024 Q1 earnings conference call. Today, I will go over the company's Q1 results, followed by an update of our game business and new game lineup. First, our Q1 consolidated results.

Q1 consolidated revenue was KRW 157.8 billion, which is a 13.7% decrease Y-o-Y and a 1.6% decrease Q-o-Q. Even though Com2uS stand-alone revenue remained solid, supported by strong revenue from games such as Summoners War: Sky Arena, consolidated revenue decreased due to decrease in number of subsidiaries included in consolidation.

Q1 operating profit was KRW 1.2 billion, returning to a quarterly profit from loss-making quarters both Y-o-Y and Q-o-Q. The business efficiency drive at Com2uS and both subsidiary levels since the second half of last year and the solid performance of key games, including Sky Arena, were the main drivers of the return to black on a consolidated basis.

Q1 consolidated net profit was KRW 4 billion, returning to a net profit from the net loss last quarter and a decrease Y-o-Y due to factors including reflection of discontinued operating profit.

Next is a look at Com2uS earnings on a stand-alone basis. Q1 stand-alone revenue of Com2uS was KRW 126.7 billion, with a 2.7% decrease Y-o-Y and a 3.6% increase Q-o-Q. RPG game revenue increased by 11.1% Q-o-Q, thanks to the tenth anniversary event of Summoners War: Sky Arena. And sports game revenue increased by 45.2% Y-o-Y with both MLB and KBO licensed games growing. Q1 stand-alone operating profit was KRW 6.2 billion, returning to a profitable quarter, thanks to growth of major games and also the effect of cost efficiency initiatives leading to operational leverage effect.

Next on the details of the operating expense at Com2uS stand-alone level. Com2uS stand-alone Q1 operating expense decreased by 8.2% Y-o-Y and 0.6% Q-o-Q, reflecting our cost efficiency drive. Q1 marketing expense increased 12.5% Q-o-Q due to marketing for the launch of Starseed, but decreased by 50.3% Y-o-Y according to the emphasis on efficient marketing spending. Labor costs increased 6.9% Y-o-Y and 3.6% Q-o-Q due to increase in retirement benefit payouts. Fees and commissions decreased by 1.2% Y-o-Y and 0.5% Q-o-Q. Royalty expenses increased by 55.6% Y-o-Y due to IP collaboration.

Next is the revenue breakdown by game category. Q1 RPG game revenue was KRW 81.7 billion, which is a 15.7% decrease Y-o-Y and an 11.1% increase Q-o-Q. Summoners War: Sky Arena reported the highest traffic in recent 3-year period and revenue increased both Y-o-Y and Q-o-Q terms, thanks to the effect of the 10th anniversary events, including The Witcher 3: Wild Hunt IP collaboration.

For Chronicles, key metrics have been stabilizing and collaboration with Slayers TRY IP was carried out to celebrate the first anniversary of global launch. Sports game revenue was KRW 42.5 billion, which is a 7.4% Q-o-Q decrease, reflecting the baseball off-season. But on a Y-o-Y basis, this is 45.2% growth, thanks to the revenue increase of Com2uS Pro Baseball V24 and the MLB Rivals launched in July 2023. Casual game revenue in Q1 was KRW 1.3 billion.

Next is the game revenue breakdown by region. Q1 overseas game revenue was KRW 92.3 billion, which is a 9.9% Y-o-Y decrease, but a 6.6% Q-o-Q increase as the increase in Sky Arena revenue offset the decrease in Chronicles global launch effect. Overseas revenue was roughly 69% consisting of North America 29.3%, Asia 22.3% and Europe 14.5%. Europe accounts for about 15% of our game revenue and the effect of Apple lowering its App Store commission rate in Europe is already having a positive effect on our commission expense.

Next is an update of the game business. Sky Arena achieved significant increase in NU and DAU, thanks to The Witcher 3 IP collaboration and the 10X10 Festival and delivered both Y-o-Y and Q-o-Q revenue growth. In Q2, various online and offline events are planned as part of the 10th anniversary celebration.

Starseed, which was launched in Korea on March 28 is planning global rollout in Q3. Since opening in Korea, Starseed has had more than 1.5 million aggregate downloads and widened user coverage by supporting mobile-PC cross-play.

On May 9, a major update was released with new characters and guild collaboration/competition content. Regular updates every month and every 2 weeks are planned to maintain stable traffic numbers.

Our MLB lineup also reported solid revenue trends, including promotions tied to the MLB Seoul Series held in Gocheok SkyDome in March. MLB 9 Innings Rivals changed its name to MLB RIVALS to position itself as the new baseball game brand.

The KBO lineup went through an update in time for the baseball season kick off and is showing solid revenue performance. Com2uS Pro Baseball V24 set a new monthly grossing record in history. With the new baseball season underway, our baseball game lineup is expected to show serious growth from Q2.

Next is the new game lineup. Com2uS has been strengthening our lineup by not only publishing various game categories, but also by developing games ourselves. Starseed launched in Korea on March 28, is preparing for global rollout and Frostpunk is planning global launch in the second half of this year, following early access opened in 3 countries, including the U.S. last January. BTS Cooking On is also preparing global launch in the second half.

Next is a preview of the new in-house developed Japan NPB licensed baseball game. Leveraging our global operational knowhow of baseball games demonstrated by our #1 grossing MLB licensed mobile game, we are preparing the launch of Japan NPB-based licensed baseball game in 2025.

This is a new game developed using our 20 years of baseball game development and operational know how and uses the top-quality baseball game engines proven by Com2uS Pro Baseball V Series and MLB RIVALS. It will feature differentiated graphic quality and fonts as well as scan the current NPB players, renderings of 12 baseball stadiums, a latest roster and game schedules to target the Japanese pro baseball market.

Japan is one of the biggest baseball game markets and the mobile baseball game market was estimated to be around USD 350 million a year as of 2023. Com2uS have been expanding its baseball lineup with Com2uS Pro Baseball V in 2022, followed by MLB RIVALS in 2023 and we expect our sports game revenue to step up to the next level with the launch of Japan NPB game.

In addition to the Japan baseball game, we have a pipeline filled with both in-house developed and publishing games across various categories targeting launch in 2025. Detailed schedules will be shared with you at a later time. The company will focus on consistently launching new games to drive its business performance and remain profitable.

That ends the presentation on our Q1 results, and now we will take your questions. Thank you.

[Unknown Executive]

[Foreign Language]

[Interpreted] [Operator Instructions] The first question will be provided by Kim Hak Joon from Kiwoom Securities.

[Hak Joon Kim, analyst]

[Foreign Language]

[Interpreted] I have 2 questions. First question is about Starseed. Can you give us a bit more detail about the current situation of Starseed since its launch in Korea? And also, can you give us a bit more details of the timeline for its global release?

Second question is about the effect of Apple lowering the commissions on its App Store in Europe. What kind of -- or how much of a financial effect is the company expecting from the lowering of that commission?

[Han Ji-hoon, executive]

[Foreign Language]

[Interpreted] This is Ji-hoon Han, Head of the Game Business. I'll answer the first question about Starseed. Starseed was launched in Korea last March. Compared to its initial launch, its traffic and revenue numbers have come down, but it is stabilizing. And we had a major update, as we mentioned yesterday, and the update is having the effect of uplifting our key metrics.

Regarding the global release of Starseed, we are targeting Q3. And for the Q3 global release, we will leverage the experience that we've had from the Korean launch, various trials and errors will be used to supplement and improve the game before the global release. Especially for the global release, we'll focus on actually developing it more towards an idling game so that it would target a larger audience. So that it would be able to target a wider user group and higher revenue.

Your second question about the effect of Apple lowering the commission rate on App Store in Europe, that won't have a considerable effect in lowering our commissions on a full year basis. As you know, Sky Arena, which is one of our key titles, does have a significant share of revenue coming from Europe. As of last year, around 25% of Sky Arena revenue came from Europe and the Europe App Store lowered the commission rate from 30% to 20% as of March 8. So we are expecting there to be a significant level of savings from that lowering.

[Unknown Executive]

[Foreign Language]

[Interpreted] The following question will be presented by Kim Jiwon from Hanwha Securities.

[Jiwon Kim, analyst]

[Foreign Language]

[Interpreted] I have 2 questions. The first question is about your new game lineup. First of all, for example, in 2025, if you have plans of releasing new games such as Starlight. Can you give us a bit more detail about how much of an effect you're expecting on Starlight? Also you've made some important investments in companies such as Air Button. Can you give us some update on the development speed that you're having there?

In terms of the new game lineup, you've also highlighted the release of the Japan baseball game. Considering that the Japan baseball game market is already dominated by large existing players, can you give us a bit more detail strategically, how you plan to differentiate yourself from existing Japanese baseball games?

And also, do you have plans of diversifying the platform, not just mobile, but also extending to console or PC games for your Japanese baseball game and even though it may not be easy, can you share with us some quantified numbers, for example, the size of revenue you are expecting from the Japanese baseball game launch?

Second question is about your expense side. Actually, I had expected your Q1 expenses to increase a bit given the fact that you are going through the 10th anniversary of Summoners War and you've launched Starseed but actually, your expenses have improved. Can you give us a breakdown of the reason why your expenses have relatively improved? And also going forward, how much of a promotion expense are you expecting to spend this year?

[Jae-gwan Nam, executive]

[Foreign Language]

[Interpreted] Well, this is Jae-gwan Nam, the CEO. I think I can answer your question by giving you an overview of the current situation in the game market and also answer your questions on expenses before handing over to Mr. Han who will address the details of Starlight and Air Button.

Well, looking at the current game market, actually, there are many capable competitive game developers out there, and we're seeing new game developers also appearing. As regarding these strong game developers, they're actually succeeding quite well in attracting investments and also signing publishing contracts for their games.

In some cases, there's quite a bit of competition over working with these stronger game developers. And I think that this is a great proof of the dynamism and the health of the overall game industry in Korea and is a sign that makes us look forward to a rebound, a turnaround of the overall game industry.

Com2uS was able to actually sign a publishing agreement for great games being prepared by Air Button. And I think the fact that Com2uS was able to sign that publishing agreement is proof of the global game business capabilities that we have as a company.

So going forward, our basic approach regarding games is to have a balanced approach across both publishing games and our in-house developed games. And by balance, I mean balance in terms of not only the number of new games, but also the investments that we will be making, we'll have a balanced approach cost-growth so that we are growing.

We are preparing quite a strong game lineup for next year. I think in terms of title, we've only mentioned the Japanese NPB baseball game and Starlight, but we are comprising a strong game lineup for next year. And the details we will share with the market once the schedules are determined.

You've also asked about the marketing expense. I think one thing we need to point out about marketing in Q1 was that a large part of the Summoners War: Sky Arena event was the collaboration that we had with Witcher. And a large part of that Witcher collaboration is captured as loyalty expenses.

Now looking towards Q2. Q2 would be when the Summoners War anniversary events actually kicked in full fledge. Also, it is the baseball season and also Starseed would also be in operation for full quarter.

And therefore, in Q2, while we expect there to be a sizable increase in our top line, we also see the need to make some marketing expenses to keep the business running for the full year. So to just give you a preview of our marketing expenses for Q2, we are expecting there to be an increase in the marketing-to-revenue ratio in Q2 versus the ratio in Q1.

[Han Ji-hoon, executive]

[Foreign Language]

[Interpreted] To answer your question about Starlight Air Button, and the NPB baseball game. Starlight, we are currently developing with a rule of launching in 2025 next year. Currently developing -- development is going very smoothly at fast pace. Within the company, we have very high expectations for Starlight. We are targeting that and positioning in as AAA MMO RPG game.

Regarding Air Button, even though it is a relatively young company, it's actually making quite fast progress in terms of planning and proto-ing. We've already kicked off our project together with Air Button. And we are finding a meeting of minds with them in terms of direction. Actually having worked with them until now, we are actually surprised by the amount of speed the company is making. So we actually have high expectations of them being able to complete a larger than -- a product that's larger than what the market or we expect and to actually develop it with quite speed.

Now about the Japan NPB baseball game. Actually, in terms of mobile baseball games, Japan is the world's second largest market following the U.S. In terms of launching a baseball game in Japan, we are focusing on 2 key selling points. One is the fact that currently, most of the baseball games in Japan are casual -- have a casual look and feel.

We want to differentiate ourselves by focusing on graphics that are like-for-like graphics. This actually comes from the experience we had with the successful launch of MLB RIVALS in Japan actually was able to attract a large number of downloads and users because of the life-like graphics that we provide.

The second point is that we will be focusing as a mobile baseball game player. As you mentioned, the Japanese baseball game market is dominated by a practical monopoly, but that's very controlled, concentrated but we are seeing a shift within the Japanese market towards mobile platforms. And actually, I think by positioning ourselves as a mobile baseball game provider, we will be able to differentiate ourselves and get an edge even though we are a newcomer to the market.

[Unknown Executive]

[Foreign Language]

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Jae-gwan Nam, executive]

[Foreign Language]

[Interpreted] I think during the previous answer, I mentioned that we're absolutely looking forward to a turnaround or rebound of the game industry. To give you a bit more detail of why we have that expectation, there are game developers such as Tikitaka, OOTP, that actually hung in for quite a long time and finally seeing some productive results.

Now, on the game business, the visual content area is still needing more time to rebound. And actually, we do have some promising projects that will come and be launched in the second half. But while that happens, we need to concentrate, first of all, on the basics, which is to continue to develop competitive content. And also, while that happens, we will focus on finding more opportunities of business efficiency and leveraging that and also to find areas where we can implement a pivoting strategy.

[Unknown Executive]

[Foreign Language]

[Interpreted] Are there any questions?

[Unknown Analyst]

[Foreign Language]

[Interpreted] Thank you for giving me this opportunity to ask you follow-up question. You've just mentioned some subsidiaries and that you're actually having -- you actually have some projects that you're looking forward to in the second half. But I think looking at the company's turnaround, one of the main reasons why it was able to [indiscernible] is because the expenses have been reduced at a subsidiary level.

In that context, can you give us a bit more guidance of what kind of expense trends, how much reduction you're expecting or how much expenses you're expecting from the subsidiary level this year?

[Unknown Executive]

[Foreign Language]

[Interpreted] Well, until the subsidiaries start to generate top line growth, the expenses are mainly fixed expenses, that's labor or office lease and rent, expenses that are not tied to revenue generation.

As you know, most of our subsidiaries are production houses, either visual content or game developers, and therefore, we have already been in the process of making the fixed expenses of these subsidiaries as efficient as possible. We have been reducing their office space and head count to the minimum requirement.

So having done that, our subsidiary basic strength and expense structures have been more stabilized and have become stronger. As you know, Com2uS, which is one of these companies have been going through quite aggressive reduction in their personnel.

And having gone through that exercise, I do believe that, as Com2uS group, we have become stronger in terms of profit generation potential and fundamental. Of course, we will continue to focus on business efficiency so that we become even stronger in terms of future profit generation capabilities.

[Unknown Executive]

[Foreign Language]

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Jae-gwan Nam, executive]

[Foreign Language]

[Interpreted] Well, since there's no further questions, I would like to close the call and make some final comments before we close the call. As a CEO, I would like to express the fact that this is the first year the company has been publishing on the publishing side of the business seriously. And I think there are 2 key factors in successful publishing. One is to search the strong and good games, but also an important factor is communicating very effectively and well with the game developers.

And I think Starseed is an excellent example of how we are able to work very well with the game developers. Since the launch of Starseed in Korea, we have been communicating very well and effectively with the developer. And this actually gives us a very good foundation for preparing for the global open of Starseed. It means that we are able to actually implement strategies very nimbly depending on the market situation as we see it.

And we are looking forward to not only a stronger capability on the publishing business side, but also we have, as mentioned, developing and preparing a strong pipeline of our own in-house developed games and that's why I ask you to have higher expectations and look forward to our business performance second half and next year.

[Unknown Executive]

[Foreign Language]

[Interpreted] And that completes our conference call. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]