Com2uSCorp

KOSDAQ:078340

Earnings Call Transcript 2023-Q3

[Operator]

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2023 Third Quarter Earnings Results by Com2uS. 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 2023 Third Quarter Earnings Results by Com2uS.

[Unknown Executive]

[Interpreted] Good morning. This is Associate Manager, Dia Joon Park of the IR team at Com2uS. Thank you for joining our earnings conference call for third quarter 2023. This call will be consecutively interpreted between Korean and English.

CEO of Com2uS Ju-Hwan Lee is also present as well as the Head of Business Strategy Group [ ByungChul Lim ], our Game Business Group Head, [ Sun Chifu ]; Head of Finance, Won-Jun Choi; and Head of IR, Dongsu Kim.

We will start the call with a presentation on our third quarter results and a business update before taking your questions. The material that we will be using for this conference call has been prepared based on K-IFRS basis and the material is available on our website.

Now our Head of IR, Dongsu Kim, will take you through our third quarter results.

[Dongsu Kim, executive]

[Interpreted] Good morning. This is Dongsu Kim, Head of IR at Com2uS. Thank you, shareholders, investors, sell-side analysts for joining our third quarter earnings conference call. Today, I'll go over the company's consolidated and parent stand-alone third quarter results, followed by an update of our game business and media business. First, our third quarter consolidated results.

The company's third quarter game business revenue increased by 12.5% year-over-year, thanks to solid performance of Summoners War and added boost from the new games, which is our MLB 9 Innings Rivals. The media business revenue decreased year-over-year by 25.9% due to lack of large-scale projects during third quarter. Overall company's consolidated revenue in third quarter was 189 -- excuse me, KRW 186.7 billion, which is a 0.3% year-over-year increase.

Consolidated operating loss was KRW 1.6 billion, which is a KRW 3.7 billion improvement versus the operating loss last quarter, but a fall to a quarterly operating loss versus the profitable third quarter of last year, mainly due to increased operating loss recorded by the media content subsidiaries despite the game businesses improved profitability quarter-over-quarter. Next is the stand-alone results of Com2uS, the parent, which mainly reflects our game business.

Q3 stand-alone revenue was KRW 137.6 billion, which is a 10.9% Y-o-Y increase, but a 12.7% Q-o-Q decrease. Even though revenue of Sky Arena remained solid, RPG revenue decreased by 26.7% Q-o-Q as the launch effect of Chronicle faded. Sports revenue increased by 22.6% Q-o-Q, thanks to launch of new games such as MLB 9 Innings Rivals.

Our stand-alone operating profit was KRW 13.9 billion, which is a 13.1% increase Y-o-Y and 163.4% increase Q-o-Q. Com2uS stand-alone operating profit margin in Q3 was 10.1%, reaching a double-digit OP margin and a 6.7 percentage point improvement versus the second quarter. Our emphasis on labor cost and marketing efficiency contributed to the Q-o-Q improvement of the game business profitability.

Next is our revenue breakdown by game category. By game category, RPG revenue was KRW 85.4 billion, which is a 5.3% Y-o-Y decrease and a 26.7% Q-o-Q decrease. For Sky Arena, the previous quarters, reloaded update stabilized and the SWC2023 also drove up user attention. However, revenue decreased in part due to seasonality and also wearing off of Chronicle's global launch effect that was enjoyed in Q2.

Sports games, including our baseball game lineup, reported revenue of KRW 47.3 billion, which is a 54.8% increase Y-o-Y and a 22.6% increase Q-o-Q, thanks to the hit of MLB 9 Innings Rivals launched in July, supported by the solid performance of our existing baseball portfolio. Casual game revenue was KRW 2.6 billion, which is a 61.9% increase Y-o-Y, reflecting the successful global launch of Mini Game Party.

Next is the game revenue breakdown by region. In Q3, overseas game revenue was KRW 101.4 billion, which is a 19.2% Y-o-Y increase supported by the launch of MLB 9 Innings Rivals, but this is a Q-o-Q 19.5% decrease due to Sky Arena's low seasonality and Chronicle's revenue stabilizing after its global launch.

By region, North America accounted for 29.6% of revenue. Asia, 24%. Europe, 14.6%, stable and even across all regions. The share of overseas revenue in our game revenue increased to 70.9%, which is a 4.0 percentage point gain Y-o-Y. And we expect a solid revenue of Sky Arena and MLB lineups, both with high overseas revenue will keep our overseas ratio of revenue at a stable level.

Next is a look at Q3 operating expenses. Our Q3 operating expense was KRW 188.3 billion, which is a 2.0% increase Y-o-Y due to marketing for new games launched in July, including MLB 9 Innings Rivals, Ace Fishing: Crew, and Minigame Party, but a 19.4% decrease Q-o-Q, thanks to the focus on efficient marketing spend during Q3. Marketing expense of KRW 18.8 billion, which is a 3.5% increase Y-o-Y mainly due to launch of MLB 9 Innings Rivals and Mini Game Party, but this is a 46.8% decrease Q-o-Q, reflecting efficient marketing spend on existing games.

Service fee was KRW 55.1 billion, which is an 8.7% increase Y-o-Y, but a 11.7% decrease Q-o-Q in proportion with change in our game revenue. Labor cost was maintained at a stable level. And the company will continue to maintain an emphasis on efficiency of not only marketing costs, but also overall costs in order to further improve profitability.

Next is a detailed look at the game business by category. First, regarding our RPG games, Sky Arena completed second major update following the Reloaded update. User play satisfaction has been strengthened with an update of the PvE strategic content dimension hole by adding a single-player content, Dimension Raid and also adding New Second Awakening Monsters, which has been driving solid revenue. The SWC2023 successfully ended with the World Final held in Bangkok on November 4, following qualifying rounds and regional cup events, which further strengthened the Sky Arena fandom.

Chronicle continues to maintain stable traffic, supported by the 1-year anniversary promotion and regular monthly updates. Game IT sales and events have also been active tied to the introduction of new Summoners and Monsters.

In Q4, we have several initiatives to maximize the RPG revenue performance. Sky Arena has planned a Sky Fever Season Event that supports high-speed growth and aggressive events tied to the year-end seasonal issues as well as large-scale updates to further strengthen user satisfaction. Chronicle's will focus on user traffic management and stable revenue generation through the North America 1-year anniversary and year-end promotions.

For our baseball games and other sports game, MLB 9 Innings '23 continues to remain the solid #1 global grossing mobile MLB license game and maintain solid revenue driven by active item sales, leveraging monthly issues such as the All-Star Game without signs of cannibalization by new games. The new MLB game, MLB 9 Innings Rivals officially launched on July 5, successfully rolled out in key markets, such as Japan, Taiwan and U.S. and further strengthened our MLB lineup through live updates such as adding new players.

The Com2uS Pro Baseball 2023 and Com2uS Pro Baseball V23 are also maintaining successful performance with sales of various items tied to seasonal issues. Com2uS Pro Baseball V23 set a new monthly revenue record in September and continues to show an upward trend in both revenue and traffic numbers. In Q4, both our MLB and KBO games are planning to maximize revenue using issue related update and promotions such as post season and still fleet.

Next is about our new game lineup. Com2uS plans to strengthen its game lineup by using both internally developed as well as published games. Starseed: Asnia Trigger scheduled for launch in Q1 2024 is a character collection RPG that collects and raises realistic proportion of pretty girl characters developed by Mojito Games and published by Com2uS. It features high-quality concept art and animation and will be dubbed by famous voice actors to provide high level of user satisfaction. They will also feature unique content such as in-game social media, designed to create stronger user immersion.

Following its launch in Korea, Starseed: Asnia Trigger is planned for a global rollout.

Frostpunk: Beyond the Ice, which is targeting launch in first half of 2024 is a survival building and business simulation game based on the original Frostpunk game IP, which has sold more than 3 million copies on PC and console. It features a high-tension storyline with territory expansion and life-death decisions under extreme conditions and social content, such as Guild that leverage the strength of the mobile platform. Our Frostpunk: Beyond the Ice is being developed by NetEase and Com2uS plans to publish it globally for mobile. We also plan to globally publish BTS Cooking On: Tiny Tan Restaurant in the first half of 2024, and we expect to continue to publish compelling games across various categories to create a stronger pipeline.

Next is a look at our media business. Third quarter media business revenue was KRW 45.8 billion, which is a 22.7% Y-o-Y decrease and a 33.4% Q-o-Q decrease. In visual media content, we see the pullback trigger for movies between theater screening and OTT uploads getting shorter and shorter, which has decreased the audience pool and also weakened competitiveness of movie content in general. As a result, overall theatergoing audience size has not recovered the prepandemic levels.

Also for TV dramas, overall market growth has been slowing down as major channels no longer schedule dramas on their usual Wednesday, Thursday lineup and have been scaling down dramas even on the Monday, Tuesday lineup. Despite such market conditions, in Q3, our media business participated in the co-distribution of the movie Road to Boston, which brought in a total of around 990,000 audience. And dramas that aired during Q3 include the Cold Blooded Intern on tvN, New Recruit Season 2 on ENA, Numbers on MBC. Also, we produced highly popular entertainment projects, including Street Women Fighter 2 on Mnet and City Fisherman on Channel A, once again, proving the strength of our media content business.

On the K-Pop side, around 30 concerts of various artists, including ATEEZ Asia and Latin America tour were carried out, but revenue decrease on a Q-on-Q basis. Despite the challenging market environment, our media business continues to work to build a strong content lineup across various genres and to deliver competitive content. In Q4, a new drama starting Lee Young-ae titled Maestra is scheduled to air on tvN in December. And in 2024, the much-awaited drama such as A Shop for Killers starring Lee Dong-wook and Blackout starring Jong Hyun are preparing to air on Disney+.

For the movie side, Seeking the King, starring Koo Kyo-hwan is preparing to open in the peak summer season of 2024. This is an SF adventure film about a military doctor and challenged people encountering an unidentified guests in a village in the DMD stage in the summer of 1980.

For K-Pop in Q4, we're planning concerts in Korea and overseas by artists such as Xdinary Heroes, xikers and fan events for K-pop artists with global fandom such as Stray Kids, IVE and NCT to steadily build up the commerce business. The commerce business, which includes artist merchandise sales and collaborations with cosmetic brands, is expected to be an additional source of income for the K-pop business.

Despite the increased competition and weak market conditions of the movie, drama and K-pop industry, our Visual Media and K-pop business is focused on delivering better performance even after Q4 based on strong concert -- content and lineup. In Q3, even though our major games faced negative seasonality, the growth of our baseball lineup and our internal operational efficiency efforts helped improve the stand-alone OP margin of Com2uS. However, on a consolidated basis, the company was not able to pass BEP due to weak performance of the Media business.

With our flagship RPG games in a stable stage, we plan to actively expand our game publishing business to strengthen our game pipeline for 2024 and also build up a strong media content lineup. At the same time, we will maintain our focus on -- to maximize our profitability.

That completes the presentation of our third quarter earnings, and now we will take your questions.

[Operator]

[Foreign Language] [Operator Instructions] The first question will be presented by Dong Kim from Kyobo Securities.

[Dong Woo Kim, analyst]

[Interpreted] I have two questions. First question is about your plans of further enhancing your operational efficiency. Can you share us some details about that? Second question is about your game lineup. How are you planning to increase or expand your game lineup going forward?

[Unknown Executive]

[Interpreted] I will talk to your first question about our operational efficiency, that applies for not only our subsidiaries, but also Com2uS, the main company. We're various -- we're looking into the various businesses and services that we're operating both at headquarter, that's mother company, as well as a subsidiary level and trying to figure out what are the services that are not fit with the market situation or not as competitive. And we have been scaling down some of the less competitive or not really market relevant businesses. And therefore, going forward, we do -- we expect our increase of labor or other fixed costs to be very limited.

To give you a bit more detail of what we have been doing with Com2Verse. The Com2Verse have been affected by the overall sluggishness in the Metaverse industry, which has happened with the end of the pandemic as we entered the so-called endemic area. However, despite that overall market weakness, Com2Verse has been going through various events. For example, it hosted a major global forum posted by a Korean media company in September on its platform as well as the government -- major Korean government sponsored event in October and also other game-related events.

And based on that, Com2Verse has made a rather strategic structure restructuring to focus on the convention center service. We believe that actually going forward, there will be business opportunities and service opportunities by providing such convention-related services in Metaverse as well as town hall events hosted by companies or local governments. And that is why we have made a strategic restructuring of Com2Verse. And with this lighter structure, it will be able to more nimbly and flexibly respond to changes going forward.

To answer your second question about the direction and strategy of the publishing business for Com2uS, as we have mentioned, we have already signed contracts for two major projects. One is the Starseed: Asnia Trigger, of which we're planning to launch in first quarter of 2024 as well as the Frostpunk: Beyond the Ice project, which we're planning to launch in first half of 2024.

Our basic direction and strategy regarding publishing, I think, can be defined in two major points. One is that we will focus all of our resources and energy on increasing our global publishing, so that we -- in the past, Com2uS has been rather passive on publishing or sourcing from outside. But going forward, we will focus on finding global publishing opportunities not only among Korean developers, but developers in China, Japan and global publishers will also be in the scope of what we look at to find investments and sourcing opportunities for game publishing. And this is how we plan to fill out and build the pipeline for 2024 and 2025.

The second key focus of our publishing business is that we will be focusing more particularly on the midsized and large-sized games to publish, which will have a larger impact both on our top line and bottom line.

To give you a bit more detail about publishing, we think that there are two key features that are necessary for a successful publishing of a game. One is the publisher has to have enough financial resources to fully back the developer. Also, the publisher has to have the capabilities and the know-how of successfully publishing a game globally. Com2uS actually has both, and that's why we're very confident that we will be very successful going forward in our publishing business.

One of the key requirements that we have when we select games to publish is that Com2uS has to gain the global publishing rights. That applies even to the game that we have signed from an overseas global developer. Even though it is developed by an overseas developer, the developer has given Com2uS the publishing rights globally, and that is once again a sign of the confidence that the developing community has about Com2uS' global publishing ability.

[Operator]

[Foreign Language] The following question will be presented by Hoyoon Jung from Korea Investment & Securities.

[Hoyoon Jung, analyst]

[Interpreted] I have two questions. First of all is recently, we've been seeing a lot of news and media articles related with the Middle East. Can you share your detailed plans on expanding into the Middle East or cooperating with players in the Middle East? Second question is about your cash. The company does have quite a large cash holding. How are you planning to use your cash resources?

[Unknown Executive]

[Interpreted] Regarding the Middle East, to give you a bit of an update on the current Middle East market situation, according to KOCCA, the size of the game market in Middle East and Africa as of 2022 was estimated to be around KRW 9.6 trillion. If you look at the Saudi market alone, in 2022, the Saudi game market was over KRW 1.6 trillion market. It's expected to grow to KRW 2.3 trillion by 2027. So it is sizable as well as a high growth potential market.

As you know, Com2uS has experience of having gone overseas. We already have our local entities in U.S., Europe and Japan. We think that Middle East also is a market where localization is very critical, and that's why we're considering establishing also a local entity in the Middle East at this point. And so we plan to provide a very localized content for the Middle East market for not only our own games, but the games that we'll be globally publishing.

To give a bit more detail. For example, as you know, we host the SWC, which is a major esports event that the company has been hosting on an annual basis. We think that we could, going forward, at one point, host the SWC event, the Asia Pacific Cup in a Middle Eastern country. Also, Saudi Arabia recently announced its plans of hosting the esports World Cup. We're currently working and talking with that Saudi counterpart as -- to look into ways for us to also cooperate in that esports world cup project. Also, when we look into the Middle East, it's a great market, not only for games, but also other businesses, the content business that we have. So we're also, at the same time, looking into potential opportunities for drama, movies or K-pop in Middle East.

Your second question was about our cash. Yes, as you mentioned, the company currently has around more than KRW 500 billion available for investments. Also considering the shareholders' equity that we have, we also have quite a large leveraging potential. I think top priority for cash and investment resources would be to look into game companies in Korea as well as overseas, investments into them or M&A of game companies in Korea or overseas that will contribute to the overall profit side of the company. So our game business is the top priority that we have in terms of investing our cash.

[Operator]

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

[Hak Joon Kim, analyst]

[Interpreted] I have only one question. I think I asked about this even during the last call, and that's about guidance for your media content business for next year. What kind of top line as well as profitability do you expect or plan from the media content business? I do know that the media content business is a project-by-project basis that it depends on what kind of projects hit or not. But that said, at the current moment, the media content business is presenting a burden on the company's overall profit. And therefore, I would like to hear a bit more about specific plans and your guidelines.

[Unknown Executive]

[Interpreted] Well, regarding the media business, I think we can divide that into our visual media business versus the K-pop business. For the visual media business, which is movies and drama, we are taking a conservative approach for next year. And that's mainly due to the very challenging market environment that we're currently facing on visual media side. As we mentioned, the channels -- broadcasting channels have been reducing slots and programming for dramas. Also, overall theatergoing audience size has been continuously decreasing. And given the challenging market environment, our focus will be more on controlling the cost side rather than trying to grow our top line so that we're able to at least prevent the size of losses from getting larger from where they are currently.

On the other hand, for the K-pop side business, which is mainly run by our MyMusicTaste, next year is planning to increase the number of concerts and performances at stages. And also our fandom commerce-related business will start to monetize. And so considering both factors, we are expecting there to be around a double-digit year-over-year growth next year and also on the K-pop side past breakeven point.

[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. First question is, can you give us some guidance about your marketing spend next year, given that you do have many new projects that you'll be launching next year? Second question is about an update on your share retirement program. You explained your shareholder return program. Can you give us an update on cancellation of your treasury shares?

[Unknown Executive]

[Interpreted] Your first question was about our marketing spend guidance for next year. Before I go to next year, if I just briefly recap the marketing spend trends that we've seen in the past several quarters, as of third quarter YTD base, our marketing spend was KRW 83.5 billion on an execution basis to YTD third quarter game revenue, that's around 19.2%. To look at second quarter YTD actually, marketing spend was around 22% for second quarter YTD game revenue. So once again, you can see that we have been focusing on very high level of marketing efficiency during Q3.

This high level of marketing efficiency will continue until next year. So we will be maintaining marketing spend efficiency, even though there may be some variance from quarter-to-quarter, for example, marketing going a bit up during quarters where we have new game launches versus those that are not. But on a full year basis, our basic guidance for next year is to maintain our marketing spend to 20% or less of our game-related revenues.

There may be a possibility of our marketing spend going beyond 20%, but that would be only when we see a very clear sign that our marketing spend will return in a higher revenue. And so next year, our basic approach is that our marketing spend will be tightly coupled with our game-related revenue.

[Unknown Executive]

[Interpreted] Regarding the shareholder return, we mentioned during our first quarter earnings conference call that the company will be using 33% of its operating cash flow recorded during the previous 3-year period for shareholder return, including cash, share buyback and share cancellation. During this year, we've already gone through two rounds of shareholder returns, including KRW 30 billion of dividend payout as well as share buyback around KRW 29.9 billion. And the shares that we have bought back will be canceled as part of our total shareholder return policy.

[Operator]

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

[Unknown Executive]

[Interpreted] Since there appears to be no further questions, we will end the third quarter conference call of Com2uS here. Thank you very much for joining us.

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