Com2uSCorp

KOSDAQ:078340

Earnings Call Transcript 2023-Q2

[Unknown Executive]

[Interpreted] Good morning. This is Associate Manager, Nathan, Part of the IR team at Com2uS. Thank you for joining our 2023 Second Quarter Earnings Conference Call this morning. The call will be consecutively interpreted.

Today, we have Com2uS CEO, Ju-Hwan Lee; Head of Business Strategy, [indiscernible]; Head of Game Business, [indiscernible] Head of Finance, Won-Jun Choi; and CEO of Com2Verse, Kyung-il Lee; and the Head of IR, Chris Kim [indiscernible].

The call will start with a presentation on our second quarter results and future business strategy before taking your questions. Also, I remind you that the presentation that we use today, which you can find on the Com2uS website has been prepared on K-IFRS consolidated basis.

I'll now come to the Head of the Business Strategy, [indiscernible] who will start -- will take you through the second quarter results.

[Unknown Executive]

[Interpreted] Good morning. This is [indiscernible], Head of Business Strategy at Com2uS. Thank you, shareholders, investors, sell-side analysts and various stakeholders for joining our second quarter earnings conference call. Today, I will go over the company's consolidated as well as parent stand-alone second quarter results, followed by an update of our game business, media business and Com2Verse, respectively.

First, our second quarter consolidated results. The company's second quarter consolidated revenue was KRW 228.3 billion, which is an 18.1% Y-o-Y increase and an 18.5% Q-o-Q increase, thanks to the growth of our game business and solid performance of our media content subsidiaries. This was a new quarterly revenue record for Com2uS. Consolidated operating loss in Q2 was KRW 5.6 billion, which is a KRW 9.2 billion improvement versus the operating loss last quarter, but a fall from quarterly operating loss versus the profitable second quarter of last year. This is mainly due to increase in marketing expenses tied to the launch of new games.

Next is the stand-alone results of Com2uS, the parent, which mainly reflects the game business. Second quarter stand-alone revenue was KRW 157.5 billion, which is a 20.3% increase Y-o-Y and a 21.0% Q-o-Q increase. Standalone operating profit was KRW 6 billion, which is a 61.7% decrease Y-o-Y, but returning to black versus the operating loss of the previous quarter.

In terms of the game category, RPG game revenue was KRW 116.4 billion, which is a 24% Y-o-Y increase and 20% Q-o-Q increase, thanks to the full quarter global revenue from Chronicle and the solid revenue delivered by Sky Arena. Sports games, including our baseball game lineup, recorded revenue of KRW 38.6 billion, which is a 12.6% increase Y-o-Y and 31.8% increase Q-o-Q, maintaining an upward growth trend. Our sports games have reported double-digit average annual growth during the past 3 years, and MLB 9 Innings Rivals, which was released on July 5, has also shown strong performance, supporting our expectation that our sports games will continue to deliver revenue growth.

Next is the revenue breakdown by region. In Q2, overseas revenue was KRW 129.6 billion, which is a 12.8% Y-o-Y increase and a 14.3% Q-o-Q increase, thanks to the global launch of Chronicles combined with the solid performance of Sky Arena and baseball game lineup, which have always had a strong overseas revenue contribution. Domestic revenue was KRW 98.7 billion, which is a 25.8% increase Y-o-Y and 24.5% increase Q-o-Q, driven by growth of the KBO license baseball games and the media business. In terms of revenue breakdown, domestic is approximately 43%, oversees 57%. And overseas revenue account for a larger portion of the revenue and is characterized by a balanced and stable regional profile with the 57% overseas revenue consisting of 28% North America, 16% Asia and 10% Europe.

When we look at only the game revenue, the share of overseas revenue increases further to 79% with domestic revenue being 21%. MLB 9 Innings Rivals, which was launched in July, has been showing stronger performance overseas. And we expect the game business to continue to maintain a high portion of overseas revenue. We will focus on delivering continuous business performance based on a strategy that fully leverages the consistent strong overseas performance of Com2uS.

Next is a look at our second quarter operating expenses. Second quarter operating expense was KRW 233.9 billion, which is a 23.4% increase Y-o-Y and 12.7% increase Q-o-Q due to marketing for core as well as newly released games. Marketing expense was KRW 35.4 billion, which is a 58% increase Y-o-Y and 21.2% increase Q-o-Q due to the global launch of Chronicle and the Sky Arena ninth anniversary event. For the entire first half of this year, marketing expense to gain revenue reached the 20% range due to increase in marketing around large-scale new games. However, in the second half, we expect marketing spend to stabilize, as we focus on efficient marketing execution of our live game. Service fee was KRW 60.6 billion, which is a 17.9% increase Y-o-Y and 15.0% increase Q-o-Q in proportion with the game revenue increase. Labor cost was maintained at a stable level through efficient HR management.

Next is a detailed look at the game business by category. First, our RPG games. During second quarter, Sky Arena continued to enjoy a long run success, supported by the ninth anniversary event. The major update reloaded, which happened on June 30, has been well received by users, and has been driving solid revenue performance until present. Chronicles, which was launched in Korea, August last year and rolled out globally in March this year, has been recording stable revenue, thanks to the One-Punch Man IP collaboration during April and regular updates being made every 2 weeks.

Zenonia, which was launched in Korea on June 27, has been holding a stable upward mid ranking on the chart. In the second half, we also have many plans to further maximize the RPG game performance. For example, Sky Arena is preparing for the second large-scale update, and the SWC2023, which will be held in Thailand this year in November, will, once again, strengthen the Summoners War fandom. Chronicles is planning the first year anniversary update to drive up revenue and traffic. And Zenonia, also, is preparing a lower-scale update in September to maintain the stable revenue momentum.

Next is an update of our baseball game lineup and other sports game. First is the MLB 9 Innings23, which continues to remain the global #1 growth in mobile MLB licensed game in second quarter. Also, in May, it set a new DAU record, thanks to marketing stints with the WBC and [indiscernible] and a major update that added new generation and legend players.

Com2uS Pro baseball 2023 and Com2uS Pro Baseball V23 both celebrated a first season start with major updates. Com2uS Pro Baseball 2023 added a decade signature, which is a new class card; and April has its eighth anniversary event, which further strengthened its position as the #1 growth in KBO license game. Com2uS Pro Baseball V23 also ticked its monthly revenue record in May and is doing very smoothly.

The new MLB license game, MLB 9 Innings Rival, which was launched globally on July 5, has ranked #1 in popular sports games in both major app markets in key target countries, including Korea, U.S., Japan and Taiwan. Currently, it has been showing good performance in key countries and in particular, has been benefiting from the Ohtani effect in Japan. In July, when MLB 9 Innings Rival was launched, the average DAU of MLB 9 Innings 2023 increased by 23% Y-o-Y, which supports our expectation that the launch of the new game will actually raise our baseball game performance to the next level without cannibalization. In the second half, we will focus on extending the product life cycle and maximizing performance through updates and promotions that leverage major baseball season events, including All-Star Games and [ to ] season.

Next is an update of the media business and Com2Verse. Our media business continues to build up its video content lineup and also have been expanding to areas such as K-Pop concerts and commerce. Our media business revenue in Q2 was KRW 68.9 billion, which is a 19.4% increase Y-o-Y and 15.7% increase Q-o-Q, driven by the launch of several new works, including Oasis, which ran on the TV channel KBS2, and also [ saving ] 13 concerts in Korea and overseas.

In the second half, we will be focusing on improving business performance by adding new content, including dramas such as the Cold-Blooded Intern, Recruit 2 and Maestra as well as a stream of new movies. The K-Pop business, which is operated by MyMusicTaste, is planning to further enhance its business competitiveness by signing more than 30 concerts in Korea and overseas and expanding to related commerce businesses.

Com2Verse launched its Metaverse community space called SPAXE on August 1, and is planning to open a convention center in September to be followed by additional expansion of its Metaverse service areas.

So overall, in second quarter, the company maintained solid performance of its live games and also enjoyed positive effects from the new game launches, delivering both Y-o-Y and Q-o-Q growth in its game revenue and once again proving the growth sustainability of its game business. Media business revenue also grew both Y-o-Y and Q-o-Q by continuing to add new content lineup.

Going forward, the focus of the company will be on both top line growth and improving its profitability. It will first focus on maximizing the performance of its game business, while addressing efficient marketing and cost control to increase its margins. The company will also focus on accelerating the turnaround of its media business and delivering visible results of its new businesses, including Com2Verse earlier.

This completes the presentation on our second quarter results, and now we will take questions from investors and analysts. Thank you.

[Operator]

[Foreign Language] Now Q&A session will begin. [Operator Instructions] The first question will be presented by Dong Woo Kim from Kyobo Securities.

[Dong Woo Kim, analyst]

[Interpreted] The question was about marketing expenses and guidance on marketing spend in the second half. We noticed that in the first half, especially with marketing behind your core games, there was an increase of your marketing spend. Now considering the new game launches you have in the second half, as well as the promotion plans to support that, what kind of guidance can you give us on your second half marketing spend?

[Unknown Executive]

[Interpreted] Regarding marketing expenses, if I just recap some details about first half YTD first half marketing spend. Well, our revenue was around KRW 296 billion, and marketing was KRW 64 billion. So the marketing expense to revenue first half is around 22.1%. This is because we had some major marketing expenses during the first half. As you know, we have the global rollout of Chronicles, the ninth anniversary event for Sky Arena, which did have an additional upside on our marketing spend in the first half.

But looking towards the second half, we will be focusing our marketing on the live game. That means that we will be particularly focused on efficient execution of our marketing expenses. So, we think that by combining the first half with the second half, where we will have more efficient marketing spend on a full year basis this year, we will be able to keep our marketing expense to revenue within 20% or low. And so that implies that in the second half, we will particularly focus on efficient marketing control and execution.

[Operator]

[Foreign Language] The following question will be presented by Hak Joon Kim from Kiwoom Securities.

[Hak Joon Kim, analyst]

[Interpreted] My question is about your media content companies. The company has been going through a series of acquisitions, as well as investments in various media content company. Can you give us an update on how you're doing with the PMI, the post-merger integration, with these companies?

In that context, can you give us an overall view and strategy that the company has for its media content business? Also, as an extension to that question, can you give us some more specific guidelines or guidance regarding the performance of the media content business that you expect this year, as well as next year 2024? I think for the sake of the market, better understanding your business, it will be very helpful, if you will be able to provide us with some top line as well as operating level guidance for your media content business this year and next year.

[Unknown Executive]

[Interpreted] Well, to answer your question about the media content business, as you know, in terms the approved merger integration, PMI, it has been some time since we, for example, acquired a key media content businesses, including Wysiwyg Studio and MyMusicTaste.

On an ongoing basis, we have meetings both at the management level and including working staff on a weekly basis. So the communication and the collaboration actually works, as if they are part of one of the business units under Com2uS itself. So we have a weekly meeting, including executives and working level with Wysiwyg Studios, MyMusicTaste and the other media content businesses, where we share updates, information as well as strategy.

You also asked about our plans of monetizing the media content business and also for some guidance regarding the top line and operating profit. As you know, Wysiwyg Studio and some other media content businesses are listed companies on their own, even though they are consolidated onto our results. So we are not as -- we are not able to provide you with the full results or guidance of other listed companies on our call. But I think, I can share some of the first half results and the trends that we expect to see in the second half.

In terms of the first half results of the media content business, because on this call, we had just provided the content level consolidated, as well as parent standalone results. I think you will have some information that you can use to sort of infer the top line and operating level performance of the media content business.

What we have seen from Wysiwyg Studios and other media content businesses is that between first quarter and second quarter, their performance has been showing an increasing upward trend both at top line as well as operating level. We hope to see this improving upward trend to continue in the second half. The reason we believe there will be a continuing improvement in both top line and operating level performance of the media content business, number one is that, for example, Wysiwyg Studio has a larger lineup of content being produced; also, most of their content has an on-air schedule focused in the half. This is the reason we're expecting the top line revenue of Wysiwyg Studio to go up in the second half. Also, in the case of MyMusicTaste, they have a larger lineup of K-Pop concerts ready for the second half and also some of the idols are resuming their concert schedules.

On top of the expected upward trend on their top line, the efficiency focus of the marketing spend as well as labor costs also applies to the media content business in addition to the game business. So we will also be focusing on efficiency in terms of marketing spend and labor costs for the media business.

[Unknown Executive]

[Interpreted] Also, I would like to refer you to the presentation material that we are using for this conference call. If you look into the slides, for the media business, we've actually given you a bit more color and information about what is expected going forward. We, for example, divided the media content into video versus K-Pop. And also for the video content, we have broken it down to different categories. Also for the K-Pop side, you can see that we have broken it down to domestic versus overseas, as well as K-Pop-related commerce business expected and others.

We've also given you a list of the pipeline of the content that is expected, when it is expected to air as well as some of the artists that will be featured in the concerts for example, that we're planning. I think going forward, we will continue to do that. We -- even though we are limited in terms of, for example, the performance revenue or other operating numbers that we can provide to these other -- regarding these other listed companies, I think we can help the market understand the business outlook better by giving you some color and details about the pipeline.

[Operator]

[Foreign Language] The following question will be presented by Jeehoon Jeong from Merrill Lynch Securities.

[Unknown Analyst]

[Interpreted] I noticed in the second quarter, your size of operating loss has decreased on a Q-on-Q basis. With this trend going, is it safe for us to expect that the company will record an operating profit in the third quarter? If so, what will be the major factors driving that improved performance from the game side and the media content side, respectively?

[Unknown Executive]

[Interpreted] You've asked about the possibility of us turning to an operating profit in Q3. To answer that question, our expectations for both the game and the media content business is that it will deliver positive results, improving results in the second half versus the first half.

To give you a bit more detail, in the game business, as we mentioned, we will have the effect of the new games that we launched during the first half, 9 Innings Rival, Zenonia, also Ace Fishing. And on top of that, after the major update, Sky Arena is also delivering very good performance. We expect that to continue in the second half. And so overall, we think that the game business in the second half would deliver strong performance.

Also, our sports scene lineup, especially the baseball game lineup, has been growing in terms of revenue year-over-year for the past several years and has been taking up an increasing share of our overall revenue contribution. And so, we expect there to be positive additional effects from the release of MLB 9 Innings Rivals.

So we expect both our RPG as well as sports games to have significant improvement in terms of top line and profitability. As we do that, we will also, as we mentioned, be very conscious of our marketing expenses to focus that on the live games that we have currently running and to have very efficient marketing execution, so that we will be able to deliver not only significant improvement of top line, but also operating level improvement from the game business.

Regarding the media business, we're taking a more conservative stance. We have seen an improvement of the media business performance in the second quarter versus first quarter, and we expect the trend to continue, as we go into the third and fourth quarter given the long lineup of content to be released as well as the concerts that are scheduled to be put up. So, we expect there to be a top line growth of our media business in the second half versus first half. And we will also be very conscious of the expenses of the media business as well.

So given the improving trends that we expect to see both in game and media business in the second half, we will remain focused on delivering positive results in terms of profitability. We will do our best to improve our overall earnings.

[Operator]

[Foreign Language] The following question will be presented by Jee-un Lee from Daishin Securities.

[Jee-un Lee, analyst]

[Interpreted] I have two questions. The first question is about your new game lineup leading up to 2024. Can you give us some preview into what kind of games you have in the pipeline to be released next year?

Second question is about your plans regarding VR gains including Roka. There has been some talk about VR games being launched by various companies. What are the company's plans regarding VR games?

[Unknown Executive]

[Interpreted] Regarding your first question about our new game lineup leading up to next year, at least for the first -- second half -- excuse me, second half of this year, as we've been mentioning several times, our focus will be on efficiently managing our existing live games as well as the new games, we just launched in the first half.

So that will be the focus of us trying to maximize our top line growth and profitability. But in addition to that, we will also be further expanding our global publishing business, which we have been developing by leveraging the know-how that Com2uS have in overseas markets, game markets. And so, the global publishing business will also help us expand our pipeline. Regarding specific titles and names, I think, we'll be able to share that once we have more details, right.

[Unknown Executive]

[Interpreted] Now regarding the VR game that was uploaded or onboarded on [indiscernible] and the Meta market, we are looking into the initial download by users. It's very positive. And we think that, if we maintain our approach and strategy, we will be able to deliver positive results.

[Operator]

[Foreign Language] The following question will be presented by Ha Jeong Kim from DAOL Investment & Securities.

[Ha Jeong Kim, analyst]

[Interpreted] I have a question about Com2Verse. Com2Verse unveiled its new service space yesterday. And with that unveiling, I think Com2Verse shared some guidance numbers regarding expected revenue from various parts of its service and other numbers.

Do you -- does the company expect those numbers to be achieved without any issues? Are you confident and comfortable that those numbers are achievable? Although in that context, can you share with us some of the company's plans in terms of the Com2Verse head count, and future investments into the Com2Verse business?

[Unknown Executive]

[Interpreted] Now regarding the Com2Verse service, to just clarify and to remove any room for misunderstanding, actually, Com2Verse did not provide any specific number guidance regarding, for example, future revenue that it's expecting. What Com2Verse did provide was, for example, service sales, areas that it was expected or other sectors where Com2Verse could expect some fee revenue.

Now regarding the services that Com2Verse has and will be launching, as you've just mentioned, in August, we've just released SPAXE. Also, we are going to follow that up with some enterprise services such as messenger service, which we think will also increase user activity. In September, we will be opening the conference center, and we'll be using, for example, that conference center to host some major events such as the World Knowledge Forum and the Multiculture Forum. Also in the fourth quarter, we will be doing some POC with partners and further expand to B2C services.

I think, one thing that we noticed since the launch of SPAXE is that with SPAXE, we've also released a Plaza or a Square service. And we're noticing that actually there's a strong pickup of user content in that SPAXE. And so, we think that this is a good indication that our metaverse service could actually be expanded or add a stronger social media feature to it. And so, we will be actively studying that possibility.

[Unknown Executive]

[Interpreted] You've also asked about headcount and future investment plans regarding Com2Verse. Currently, Com2Verse is operating at below 150 people. So we're planning to keep the headcount under 150. And the same optimized expenses and cost policy applies also to Com2Verse as well as Com2uS, the company. And so, we are going to take a conservative approach to our expenses as well as resource management.

[Unknown Executive]

[Interpreted] So if there's no further questions, we will close the call with the closing remarks by our CEO.

[Unknown Executive]

[Interpreted] Since the first quarter earnings call until now, so we've had second quarter as well as earlier part of third quarter, looking back, that was a particularly busy trade for the company, we had a very busy calendar. As you can understand, we had the major upload remoted the uptake to [indiscernible]. We also released Zenonia. We also released MLB 9 Innings Rivals, and also Ace Fishing: the Crew. On top of that, we were also preparing the 3 types of P2E games. On top of that, as of 1st of August, we also released the Com2Verse SPAXE.

So, it was a very busy period looking back. And in the course of executing these multiple projects, there were some misses. We -- I do apologize for the users, to the users and shareholders for the misses in certain areas. But looking back, as of top of August where we currently stand, many of the games that we released and the new projects that we unveiled actually are delivering better than we -- better performance than we had originally expected. Some are coming in line with our expectations. Some projects are below our original expectations, and we are working on those to better improve it.

So the first half, we focused on launching very many new projects. I think from now on, throughout the rest of the year is the time for the company to remain focused on the existing projects to execute the business model that we planned to enhance the fun of the games and also to improve user indicators and metrics, so that we're able to deliver even better performance from the games and the new projects that we have launched and are delivering better-than-expected performance, and also to improve the games and the projects that are below our expectations, so that we're able to address the areas where users can feel higher satisfaction and fun.

So overall, in the remainder of the year, we will be focused on delivering better performance, and also keeping our costs down. And, I will once again commit that we will do our best to deliver improved performance to the market.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]