Com2uSCorp

KOSDAQ:078340

Earnings Call Transcript 2023-Q4

[Unknown Executive]

[Foreign Language] [Interpreted] Good morning. This is [indiscernible] from the Com2uS IR team. Thank you for taking the time to join us today at our fourth quarter full year 2023 earnings conference for Com2uS. Please be advised that today's call we'll be proceeding through consecutive translation.

[Interpreted] Today, we are joined by members of management, our CEO, Mr. Lee Ju-Hwan; Vice President, [indiscernible]; Mr. [indiscernible], Head of the Game Business Group; Ms. [indiscernible], Head of IR; and Mr. [indiscernible], CFO from Wysiwyg Studios.

[Interpreted] We will take you through the financial results for the fourth quarter of 2023, also full year results as well followed by a Q&A session. We look forward to your active participation. The financial information presented at today's call are consolidated earnings based on K-IFRS. Please refer to the materials which are outloaded and available on our company website.

[Interpreted] Now Ms. Kim Dongsu, Head of IR will present our fourth quarter and full year 2023 results.

[Dongsu Kim, executive]

[Interpreted] Good morning. This is Kim Dongsu, from the Com2uS IR team. Thank you again for taking the time to attend today's conference call, our fourth quarter and full year 2023 earnings. We will begin today's call with opening remarks by our CEO, Mr. Lee Ju-Hwan, which will be followed by a presentation on our fourth quarter and full year performance highlights and an update on our game and media business. Now our CEO, Mr. Lee Ju-Hwan, will start us off with some opening comments.

[Ju-Hwan Lee, executive]

[Interpreted] Good morning. This is the CEO of Com2uS, Lee Ju-Hwan. I'd like to first thank all of you for your continued interest and support for our company over the last year.

[Interpreted] In 2023, we grew our top line year-over-year, thanks to solid performance from our Summoners War: Sky Arena franchise, as well as strong growth from our existing Pro Baseball lineup, and new title releases, including MLB 9Innings Rivals. So that being said as CEO, I feel a heavy weight of responsibility for not being able to improve profitability by as much as we had expected.

[Interpreted] 2024 marked the tenth year anniversary of our flagship IP the Summoners War: Sky Arena, which continues to carry forward an impressive track record of remarkable commercial success over the last 10 years which we will continue to build upon to anchor Summoners War as the top K-mobile game loved by gamers all around the world.

[Interpreted] We have a very rich calendar event planned for this year for the Summoners War, including 10 festivals, which we will leverage to maintain a high level of engagement and interest among our users while offering them benefits.

[Interpreted] Also MLB Rivals, which was launched last July and will be recognized on a full quarterly basis starting this year, is preparing to make a quantum jump in the 2024 season, together with Com2uS Pro Baseball V series which have seen a major improvement across all metrics since the 2023 baseball season began.

[Interpreted] This year, we will take advantage of our global network and service know-how, which we have built up over many years to strengthen our partnerships with global game developers as we moved decidedly into the global game publishing business.

[Interpreted] And we are preparing ourselves more meticulously than ever before for the 3 new publishing titles that we unveiled at the January 24 Media showcase. I think you've got a taste of a meticulous testing and reflection of user feedback that went into the world. And we will continue to do the same work in collaboration with game developers to post new game titles that are executed well, offering great fun and gratification to our users.

[Interpreted] So again, we will continue to build out our very robust publishing lineup beyond the 3 titles that I've explained, again, working in tight collaboration with strong game developers, and we also continue to build up our in-house development line as well.

[Interpreted] In 2024, we will work hard to achieve both quantitative and qualitative growth by driving top line growth and pursuing management efficiency during [indiscernible] title lineup while also managing further [indiscernible] scheme. Thank you very much.

[Unknown Executive]

[Interpreted] Now we will move on to our Q4 and full year 2023 results.

[Interpreted] Fourth quarter revenue for our game business was down 3% year-on-year due to negative seasonality. Media revenue was down 48.5% year-on-year from reduced new content lineup with consolidated revenue recording KRW 164.5 billion, down 19.5% year-on-year. Revenue for full year 2023 increased 13.5% year-on-year driven by solid performance from our Summoners War IP and also growth from our Pro Baseball lineup, while media declined by 5.3% year-on-year due to delays in content lineup.

Full year consolidated revenue recorded KRW 777.2 billion, up 7.7% year-on-year, driven by growth from game revenue. In Q4, we recorded an operating loss of KRW 17.6 billion, although it is an improvement of around KRW 1.8 billion year-on-year, we continue to record a deficit as one-off costs were recognized for our media business. Full year operating loss guidance versus last year is KRW 39.3 billion.

Although game revenue increased, thanks to strong performance from our new titles, we continue to record a loss due to a rise in marketing expense for new titles and also from core sales from our media business. Q4 net loans increased year-on-year to KRW 73.8 billion after reflecting disposition loss from deconsolidation of one of our subsidiaries. We recorded full year net profit of KRW 4.4 billion. Next, we'll move on to Q4 and full year operating expense.

[Interpreted] Total operating expense in Q4 decreased 18.6% year-on-year and 3.3% Q-on-Q due to management efficiency gains in subsidiaries, including [indiscernible], and more efficient marketing spend. 2023 full year operating expense increased by 10.6% Y-o-Y from a rise in marketing expense and labor costs following the global launch of Chronicles, and also new title releases, including MLB 9 Innings Rivals.

After initiating our management efficiency initiatives in the second half of 2023, however, we have since seen a decrease in marketing expense in the fourth quarter, both on a Y-o-Y and Q-o-Q basis. Notably, market expense in the second half decreased around 22% year-on-year, which is to maintain this enhanced management efficiency throughout 2024. Labor costs have been showing stable trends from efficiency gains in manpower management, which was started in Q4 of 2023. Q4 commissions paid totaled KRW 53.6 billion, down 1.9% Y-o-Y and 4% Q-on-Q.

On a full year basis, the total was KRW 226 billion, up 14% Y-o-Y from growth in game sales. Full year royalty increased 25.1% Y-o-Y to KRW 33 billion as license-related costs rose from growth in our sports [indiscernible] titles. Full year outsourcing costs dropped 3.5% Y-o-Y to KRW 169.4 billion from a decline in media content production. Now we will move on to fourth quarter performance on a separate basis.

[Interpreted] On a separate basis, Q4 revenue was down 3% Y-o-Y, down 11.1% Q-on-Q, recording KRW 122.4 billion. Q4 RPG revenue declined 13.8% Q-on-Q after Sky Arena revenue stabilized in the fourth quarter, following a large-scale content update in Q3 while revenue from our sports genre declined 3% Y-o-Y due to seasonal weakness. Full year revenue on a separate basis showed even growth across all genre categories, including RPG, sports and casual recording KRW 547.8 billion, which is an increase of 14.5% Y-o-Y.

Q4 operating profit on a separate basis recorded a Y-o-Y turnaround to KRW 2.9 billion despite a year-on-year decline in sales, this is thanks to an improved profit structure from management efficiency gains achieved from the second half of 2023. Operating profit on a separate basis for full year 2023 was KRW 21 billion, down 46.5% Y-o-Y from an increase in operating expense, including marketing spend for new titles. Next, we'll move on to breakdown of revenue by genre.

[Interpreted] Fourth quarter RPG genre revenue recorded KRW 73.6 billion, down 16.6% Y-o-Y and 13.8% Q-on-Q. As Sky Arena takes a breather ahead of large-scale tenth anniversary event in 2024, Chronicles have seen stabilizing trends and reported a decline in revenue. Sports genre revenue was KRW 45.9 billion, up 31.2% Y-o-Y, driven by growth from our existing lineup as well as solid sales upside from our MLB 9 Innings Rivals series which got last year in July.

Revenue was down 3% on a Q-on-Q basis due to weak seasonality. In the case casual game genre, boosted by the launch of [ Minigame Paradise ], we recorded revenue of KRW 2.1 billion, up 95.3% Y-o-Y. Next, we'll move on to breakdown of gaming revenue by region.

[Interpreted] In Q4, overseas game revenue was KRW 86.6 billion, down 3.4% Y-o-Y and 14.5% Q-on-Q due to a decline in sales in the RPG genre, which typically has a high contribution from global revenue. By continent, North America accounted for 30.5%, Asia 21.2%, and Europe 14.1%, with global revenue making up 69% of the total revenue mix. As we ramp up global publishing of new game titles in 2024, we expect to maintain an even and stable revenue mix across our geographic markets.

[Interpreted] With the successful hosting of the SWC2023 World Finals last November, the Summoners War franchise has built up a solid global fan base. Our collaboration with The Witcher 3: Wild Hunt IP went live on January 31, and we're looking forward to strong synergy between Witcher, which has a strong fandom on PC platforms, and Summoners, which we began themed PC game services as of January 8.

For Chronicles, we're focusing on maintaining long-term retention and traffic through local tournaments and a 5 [ Summer ] Master event. We expect a stable pickup in revenue with a strong lineup of large-scale events and updates planned for throughout this year including a 1-year anniversary celebration event and also IP collaboration projects as well.

For MLB 9 Innings so far, it remains #1 in global sales among MLB licensed mobile game as we take advantage of post-season and seventh anniversary issue, and we're looking to maximize sales further through various events. The [indiscernible] long-term retention such as historic player update, which has so far been driving positive response from game users.

For MLB 9 Innings Rivals, we focus on defending off-season traffic through events such as the 100-day commemorative stamp, and we're aiming for a revenue uplift in the first quarter through aggressive promotions, leveraging the MLB Seoul Series, which is scheduled for March. Com2uS Pro Baseball remains #1 among KBO license gains and sales with end of season or year-end products driving quarterly sales growth.

For Com2uS Pro Baseball V series, all key metrics have been improving as we leverage post-season events and also national team packages. We intend to focus on defending off-season DAU by creating a [indiscernible] and anticipation among users through early announcements of each stage of our opening season promotion. We have signed an agreement with the [ KPBPA ] for our KBO lineup for game publicity rights and exclusive retail rights, which will allow us to continue to provide differentiated gameplay and unique fun factors. Next, I will move on to Summoners War: Sky Arena, which is nearing a 10-year anniversary.

[Interpreted] Summoners War is now in service across more than 200 countries in 15 different languages and has recorded cumulative sales of KRW 3.2 trillion as of 2023 and 200 million cumulative downloads. Currently, 86% of sales are from global, which is confirmation of its competitiveness as a global IT franchise. With the success of the SWC, now a major global esports tournament, which we have hosted in different countries since 2017, we have built up and are leading a solid global fan base. This year, we commemorate its tenth year anniversary. We have started and will be rolling out what will be a total of 10 large-scale content updates and events throughout the year.

We will continue to engage and entertain our users all year round via our 10X10 Festival. The 10X10 Festival, which will go into full swing sometime in Q2 is expected to reinforce the positive impact from our tenth year anniversary celebration for Summoners War: Sky Arena. Next, let me introduce our new title lineup.

[Interpreted] We have been strengthening our lineup not only through in-house development, but also through global publishing of new titles across different genre in collaboration with other game developers. Starseed: Asnia Trigger, which started preregistration on February 5 [indiscernible] released in Korea is a collectible RPG game developed by Mojito Games, where players collect and nurture real-life proportion female characters that feature high-quality concept art and animation, and hyper-realistic human life movement based on Motion Capture Technology. [indiscernible], our famous voice actor will provide an even more immersive user experience. The title will be published by Com2uS single local markets, first, followed by global release.

Frostpunk: Beyond the Ice is based on an original game IP, which sold over 3 million copies for PC and console game play developed by NetEase and published by Com2uS. With early access service now available in 3 markets: the U.S., U.K., and the Philippines as of January 31, reflecting eager user feedback, Frostpunk is set for global release in the second half of the year.

The third new title is BTS Cooking On: TinyTAN Restaurant, which is scheduled to start preregistration today, effective February 15, and set for global release within the first half of this year. Going forward, we will be strengthening not only our in-house lineup, but our global pushing lineup as well to compile a competitive portfolio of games, encompassing a wide range of genre.

[Foreign Language]

[Interpreted] Let me now comment on our game revenue guidance on a separate basis. 2024 game revenue on a separate basis is expected to promote driven by solid performance from our existing lineup and new game launches. We expect Summoners War to see revenue growth driven by year-round 10th anniversary events, while our Pro Baseball lineup is also expected to grow revenue as solid performance from MLB 9 Innings Rivals, which was successfully launched last July is reflected on a full year basis. And as our existing baseball lineup all continued top line growth.

From our Baseball lineup our Com2uS Pro Baseball V series, which was launched in 2022 has recorded very high revenue growth of 132% Y-o-Y. MLB 9 Innings Rivals, which is in its second year from launch is also expected to deliver strong growth in 2024 with the start of the new season as we continue to expect user feedback and incorporate our baseball development and service know-how.

Next, I'll move on to [ current status ] of our media business.

[Foreign Language]

[Interpreted] Fourth quarter media revenue was KRW 38 billion, down 48.5% year-on-year and 13.2% Q-on-Q. A [indiscernible] rate was deconsolidated following a change in its largest shareholder in the fourth quarter, which led to delay in the production and broadcasting of some media content, resulting in a decline in revenue. However, we are expecting growth for our media business in 2024 as we continue to build out a diverse content lineup, including movies, scripted dramas and also unscripted formats with strong buzzworthy value.

The trailer for Seeking the King, a film staring [indiscernible], produced by A2Z Entertainment was released on February 5, is set to open in theaters in the second half of the year. Interviews are in [indiscernible] will open in the first half. METHOD ACTING, staring [indiscernible] are among a wide array of different genre films that have wrapped production and awaiting opening. A Shop for Killers staring [indiscernible], which was unveiled on Disney+ last January was very well received by audiences taking over the Disney+ top-10 list in the TV show category in many Asian markets, including Korea, Japan and Hong Kong.

In the second half, S LINE, which is based on a [indiscernible] original as well as an untitled film staring [indiscernible] is also in the lineup. City Fisherman, which is a seasonal unscripted IP, also Street Man Fighter, our prepared air in 2024 as we continue to enhance the competitiveness of our media contents business.

K-pop revenue grew Q-on-Q in the fourth quarter, driven by counter performances by idle Group, including Xdinary, Heroes and xikers and [indiscernible] featuring top K-pop artist Riize, ZEROBASEONE and Kiss of Life. We're planning to put on more than 180 performances by global K-pop idols ATEEZ and Dreamcatcher in 2024 in and outside of Korea.

We're also planning to expand the business scope of our K-pop business further through old album productions and rereleased projects for existing library of albums while preparing a new lineup of platform-based performance and community services.

Despite the challenging business environment surrounding films, dramas and K-pop as an industry, we are committed to doing our best to continuously reinforce our content portfolio across our media and K-pop business to enhance profitability and deliver solid performance.

With that, we will now conclude our Q4 and full year 2023 earnings call for Com2uS. And we will now move on to [indiscernible] session with our investors and analysts. Thank you.

[Operator]

[Foreign Language]

[Interpreted] [Operator Instructions] The first question will be presented by [indiscernible] from [indiscernible] Securities.

[Unknown Analyst]

[Foreign Language]

[Interpreted] I will actually ask a broad-based question on your media business, in particular regarding Wysiwyg Studio. Historically over the last 3 years, it has been reporting an operating loss with widening loss year-on-year. So from the perspective of sustainability of growth, it is hard to earn market trust at the moment. So why is it that it has been suffering a loss? And when do you foresee that it may be able to turn around to a profit if you can provide more concrete guidance on the timing of the turnaround, I would appreciate it. So in the long term, if you do have a conviction that it can normalize, what kind of contributing factors do you think will help to bring it back on track?

[Unknown Executive]

[Foreign Language]

[Interpreted] So if we take a look back and recollect why we decided to move into the media business, media process business, First of all, was the synergies that we felt [ existed ] between different types of content. So obviously, on top of our game content, we felt that media, video, and music content would obviously be part of the overall time share mix, and we have -- we saw great potential in terms of the synergy that could be generated.

So when we moved in 2 to 3 years ago. Back at that time, media -- the market outlook for the media industry overall is also quite positive as K content grew more global, games actually moved out to the global markets first. And we were actually very convinced that other media content, including films and other formats would also follow on and do very well.

So again, it was based on this kind of synergy and price outlook in terms of market size, which we felt was quite convincing, which is why we decided to move in. In terms of how to move in, we felt that in M&A where we could become a major shareholder in an entity would be best.

[Unknown Executive]

[Foreign Language]

[Interpreted]. This is [indiscernible], CFO of Wysiwyg Studios. So as you know, in 2023, there were certain content lineup delays or cancellations that resulted in overall poor performance. However -- and also there were other events. Actually, there's a general election signed for this year and the Paris, Summer Olympic Games as well. So overall, this weighs on production houses in terms of programming of such content. However, in 2024, we are looking forward to ramping up monetization, improving earnings as we have strengthened our pipeline of films, scripted dramas and unscripted format content as well. And so in terms of timing of earnings improvement, we are thinking sometime in the third quarter when major content, including Seeking the King will open in theaters.

[Operator]

[Foreign Language]

[Interpreted] The following question will be presented by So-Hye Kim from Hanwha Investment & Securities.

[So Hye Kim, analyst]

[Foreign Language]

[Interpreted] So my first question has to do with overall company-wide performance. When finally, you foresee some kind of improvement, becoming more visible. And regarding your publishing line up, can you share some internal metrics, for example, your internal goal of in terms of sales for example?

[Unknown Executive]

[Foreign Language]

[Interpreted] Yes. So as Head of IR, [indiscernible] has explained earlier in our presentation, we are quite confident that we will be able to defend performance quite well in terms of our existing lineup of lab games, including our RPG titles, also our MLB or KOP Pro Baseball lineup as well. And then on top of them starting in the second quarter, we will have added performance from our new publishing titles that will add and boost -- to boost the effect. And we're also expecting improved performance from our game subsidiaries as well. As you may know, Tikitaka Studios, which is one of our subsidiaries, actually released [indiscernible] earlier this year and the new title has been doing quite well. So we're looking for this kind of additive effect, which will help us expand performance quite well.

Overall, operating costs, including marketing and labor costs will be maintained at very efficient levels. But overall, we're expecting year-on-year growth in terms of our game business.

[Foreign Language]

[Interpreted] And we are also looking forward to improved performance and the turnaround from our media business as well, including our film and other media content and K-pop business.

In terms of the timing of this kind of improvement, we believe that mostly will be focused around the second half of the year, which is where there is a high concentration of key content set for opening and release, also concerts are also primarily in the second half of the year, which is why we're looking mostly at the second half. So on balance, on a year-on-year basis, we are looking forward to consolidated revenue growth and also a turnaround to realize operating profit and I think the results will become more visible as we move closer to the second half of the year.

[Foreign Language]

[Interpreted] And now let me share our internal expectations regarding our 3 publishing lineup titles.

[Foreign Language]

[Interpreted] So starting with Starseed: Asnia Trigger. We actually started pre-reservations on the platform as of February 5, and we will be ramping up pre-registration or pre-reservation starting tomorrow in earnest.

[Foreign Language]

[Interpreted] And so we are preparing for an early domestic launch within the first half of the year, rather than having a revenue target to say, our goal for Starseed is to make it up to the top 10 list in terms of platform sales within 1 month from launch.

[Foreign Language]

[Interpreted] And for Frostpunk: Beyond the Ice, we started early access service as of January 31 in the U.S., U.K. and the Philippines, and we're currently analyzing various traffic that actually withdrawn to the early access service without any marketing on our part.

[Foreign Language]

[Interpreted] So we continue to see steady inflow of new users, particularly in the U.S. and the U.K. and all other metrics in terms of user statistics. Also, revenue-related metrics are all trending at above our initial expectations. So ahead of the second half global launch, we will continue our best to further polish the title and improve upon these metrics further so that it can be a real good project that we can look forward to as it is launched in the second half of the year.

[Foreign Language]

[Interpreted] And for BTS Cooking On: TinyTAN Restaurant, actually, we began preregistration today. And we really want to on making this very competitive cooking game. It is all right without relying on the BTS fandom. So our target is to make it into one of the global top 3 cooking simulating games.

[Operator]

[Foreign Language]

[Interpreted] The following question will be presented by Dong Woo Kim from Kyobo Securities.

[Dong Woo Kim, analyst]

[Foreign Language]

[Interpreted] So there is a lot of market interest around the low PBR value of program, if you will, so in order to enhance shareholder value, other than improving your earnings, what other initiatives do you have in the plan?

[Unknown Executive]

[Foreign Language]

[Interpreted] So actually, the company resolved upon and provided disclosure filing on our dividend policy, so we have recounted upon 100 -- or excuse me, KRW 1,300 per share for a total of -- for a total of KRW 14.8 billion in dividends. This improvement to a dividend yield of 2.7%.

[Foreign Language]

[Interpreted] So last year, we previously have announced to you our 3-year plan in terms of delivering shareholder return, which covers an array of different initiatives, including dividends, share buyback and share cancellation. And we have committed to using 33% of operating cash flow from the previous 3 years.

[Foreign Language]

[Interpreted] So pursuant to the shareholder return plan that was previously announced last year, we will continue to engage in dividend, share buyback plan cancellations this year as well. And we are very well aware of the value of program that you have mentioned, it is something of interest within this financial market. And we also will be committed continuing to do our best to further boost shareholder value.

[Unknown Executive]

[Foreign Language]

[Interpreted] Next question, please.

[Operator]

[Foreign Language]

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

[Unknown Executive]

[Foreign Language]

[Interpreted] So I think for today's presentation, we actually provided a greater level of details than in prior conference calls regarding cost breakdown, also our outlook for the game and other parts of our business. So it does seem that a lot of ground was already covered in the presentation itself. And so there are not too many questions. So with no further questions, we will now draw our conference call to a close. But if you have any further questions on nonoperating matters or our net profit, et cetera, please feel free to contact us at our IR team. So thank you very much for taking part in today's call.

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