Wemade Co Ltd

KOSDAQ:112040

Earnings Call Transcript 2024-Q1

[Operator]

[Interpreted] Good morning, and good evening. Thank you all for joining the conference of the Fiscal Year 2024 First Quarter Earnings Results by Wemade and Wemade Max.

This conference will start with a presentation followed by a Q&A session. [Operator Instructions]

Now we shall commence the presentation on the Fiscal Year 2024 First Quarter Earnings Results by Wemade and Wemade Max.

[Unknown Executive]

[Interpreted] Hello. This is [ Soo-Rae Han ] of the Wemade IR Division. Thank you for joining the 2024 Q1 Earnings Call of Wemade and Wemade Max. We have with us Chairman and CEO, Kwan-Ho Park; Senior Managing Director, Sang-Won Kim, of the IR Division; and Director Young-Jun Ko of the Corporate Finance Division. We'll start with the presentation of FY '24 Q1 results by Senior Managing Director, Sang-Won Kim, which will be followed by a Q&A session with Chairman, Kwan-Ho Park.

The results of Q1 of 2024 is provided for the convenience of the investors without completing the external auditor's review. It is subject to change in the course of final review by the external auditor. Please be advised to refer to the disclaimer from the Q1 results presentation material posted on our website.

Then we'll invite Senior Managing Director, Sang-Won Kim, for his presentation on the business outcome.

[Sang-Won Kim, executive]

[Interpreted] Hello, this is Sang-Won Kim from the IR Division of Wemade. I'd like to share with you the key business results for the first quarter of 2024.

In the first quarter of 2024, Wemade revenue reached KRW 161.3 billion, up 38% quarter-on-quarter and 72% year-on-year. Operating loss was KRW 37.6 billion, but the loss narrowed compared to the previous quarter, thanks to strong revenue growth. Nonoperating P&L reflected high foreign currency translation gains due to increase in ForEx rate and the base effect of loss on derivatives valuation related to convertible bonds from the previous quarter, resulting in [ net income ] of KRW 59 billion and controlling interest loss of KRW 55.7 billion.

The improved results in Q1 was largely attributable to the performance of Night Crows Global, which launched on March 12. Released in almost 170 countries around the world, it has surpassed $10 million in revenue in just 3 days. The Q1 revenue was remarkable, totaling KRW 57.1 billion in the first 20 days of service, with an average daily revenue of approximately KRW 2.9 billion. Night Crows Global has been well received by users across the global markets, including Thailand, Taiwan, Hong Kong and the Philippines in Asia; Brazil in South America; and United States in North America. Maintaining the excellent performance, Night Crows Global is expected to become one of the top blockchain games in the global market -- global gaming market alongside Mir 4 Global, a long-running hit since its launch in 2021.

We believe the success of Night Crows Global was possible thanks to years of know-how and the success in operating our blockchain game platform WEMIX PLAY. We expect the new MMORPG Legend of Ymir, which is slated to launch in Korea this year, and other upcoming games will also perform very well, growing from the platform capabilities of WEMIX PLAY. As was proven so far, WEMIX PLAY will be a key driver of our differentiated growth potential in the global game industry in the mid- to long-term perspective.

Q1 blockchain revenue rose 40% Q-on-Q, thanks to increased revenue in gas fees and NFT sales commission. License revenue in the quarter [ was ] at KRW 1 billion. We expect the license revenue of KRW 100 billion within this year as the second year annual payment of KRW 100 billion is to be paid to us under the 5-year Mir IP license agreement signed with Actoz Soft for the Chinese market in August last year.

Moving on to Q1 operating expenses. They increased by 7% Q-on-Q due to uplift in revenue-linked expenses such as service fees from new game launch and subsequent success. By line item, advertising expenses decreased 40% Q-on-Q despite spending related to new games. The success of Night Crows Global pushed up communication expenses, including server costs Q-on-Q. However, instead of rushing to add servers, we are striving for cost optimization as we enforce control over malicious traffic and implement a server expansion policy to ensure smooth access and gameplay for those who actually play the game. Nonoperating loss narrowed significantly Q-o-Q due to an increase in ForEx rate and foreign currency translation gains and the base effect of recognizing a loss on the valuation of derivatives related to convertible bonds in the previous quarter.

I'd like to briefly discuss the business outlook and strategy for the year ahead. First, revenue growth-wise, we expect to, once again, post a record-high revenue this year as in 2023, thanks to the success of Night Crows Global launched in Q1 and the Legend of Ymir scheduled to launch Q3. In addition, in terms of company-wide cost management with cost optimization as our top priority, we are looking to reduce outsourced development cost. We mobilized for rapid growth so far and efficiently redeploy [indiscernible] we secured up until last year to significantly enhance overall productivity. We are making all our efforts to push forward with these business initiatives and to turn a profit last year -- this year, excuse me.

The growth of the WEMIX ecosystem and the blockchain business based on it will be the biggest engine, not only for annual performance improvement but also for the long-term growth of [ WEMIX ]. The blockchain business, which has rolled in many different directions, now is viewed with the keywords of selection and concentration and will be executed focusing on WEMIX PLAY, the blockchain game platform, and Wepublic, the community platform. To this end, we have recently reshuffled the organizational structure. We will implement blockchain business expansion strategy that is centered around monetization and profitability based on stricter risk assessment and cost optimization, thereby maximizing the long-term growth of WEMIX ecosystem and Wemade.

This concludes Wemade's Q1 2024 results, and I would like to discuss key Q1 business outcomes for Wemade Max.

Wemade Max's consolidated revenue for Q1 2024 was KRW 17.3 billion, down 2% Q-o-Q and 4% Y-o-Y due to stabilization of revenues from the existing games. Operating loss was KRW 1.4 billion, and net loss was KRW 100 million (sic) [ KRW 106 million ], a substantial decrease from the previous year. Controlling interest profit was KRW 200 million swing to profit on the quarter. Overseas sales reflected the opening of new global servers with Silkroad but posted Q-on-Q drop because of a decrease in sales of other overseas games [indiscernible] domestic revenue rose 33% on quarter, with contribution of sales growth in Raising a Summon Hunter.

Operating expenses increased Q-o-Q due to labor costs associated with the recruitment of developers for new titles and advertising expenses for Raising a Summon Hunter, which ranked #1 on the Google Play Store game chart. But operating loss decreased by 9% Q-o-Q due to a significant decrease in taxes and dues related to Silkroad Online, which was incurred in the previous quarter. Net loss showed a marked reduction [indiscernible] numbers reflect nonoperating income in gains on disposition of investment securities and gains on foreign currency translation.

Now let me share with you our plans for new title development at Wemade Max. Wemade Max and consolidated subsidiaries have more than 10 new games in development, focusing on the strategy of diversifying our genres to include MMORPG subculture, idle RPG and casual. We will endeavor to show our investors progressive earnings growth every quarter by releasing more new games than in previous years.

[Unknown Executive]

[Interpreted] This concludes the presentation of business results of Wemade and Wemade Max for the first quarter of 2024. We will now proceed to the Q&A session. As previously announced, Chairman Kwan-Ho Park will answer your questions.

[Kwan-Ho Park, executive]

[Interpreted] Hello, this is Kwan-Ho Park. Please ask any questions you might have.

[Operator]

[Interpreted] [Operator Instructions] The first question will be presented by [ Jin Mae ] from Daishin Securities.

The next question will be presented by Hee-Seok Lim with Mirae Asset Securities.

[Hee-Seok Lim, analyst]

[Interpreted] Two questions. First question is, when is the launch timing that you expect in the Chinese market for the launch of Mir 4 and Mir M? And when do you think will be the time point of issuance of version number for Mir 4?

And second question is you have released a teaser for Mir 5. Compared to Mir 4, what are the key characteristics? Will it only be developed for PC platform? Or will it be rolling launch from domestic market to global market?

[Kwan-Ho Park, executive]

[Interpreted] Before I comment upon Mir 4 and Mir M, I would like to first mention this about Chinese market business strategies we have. Of course, as you know, for a long time, we have operated our business in China, and its revenue contribution is high for a sizable time period. But at this point in time, although the revenue itself is not that small, but the contribution revenue other markets than China is increasing.

As you know, Chinese market always have policy risks. And we -- from our experience, we know even when games are widely successful, sometimes we are not paid in timely fashion. So that is why we haven't included the Chinese market in our business plan and strategy. It's not because we are experiencing any issues with Mir M and Mir 4 in the Chinese market. It's because there is constant risk in the Chinese business, and this will not change going forward.

So our approach is basically if the business of Mir 4 and Mir M is successful, we will just take it as is. We will not be able to accurately project the revenue expectation and the forecast of the launch timing because the Chinese market is so volatile and subject to change.

So I cannot specifically mention the timing of issuance of version number. And as we can see from experience of other game studios, sometimes the Chinese government issue a lot of version numbers in one go. Sometimes it doesn't. And this trend is unrelated to efforts we make as a company. It is hinged upon the domestic or diplomatic relations with South Korea and the political situation internally in China. So it has innate volatility built into it.

Although we have high expectation for Mir M, Mir 4 in the Chinese market, but it will not be strictly incorporated into our business plan. We will just enjoy it as an additional income source if the business kicks off.

Regarding Mir 5, as I've mentioned in the General Shareholders' Meeting, the billing system or the probability-based boot box practices lineage has shown led to a lot of issues in the market and government policy and regulation and social controversy. That have been valid in the Korean market, but globally, it can be a problem. Even when this type of billing system racks up a lot of revenues in the internal -- in domestic market, it can act as a hurdle for the growth in the global market.

So for Mir 5, we will minimize the utilization of probability-based items or boot box system. We even think about not doing it almost at all. So we're going to introduce new billing system. And I think as a global service, we have shown and seen great potential as we operate token exchanges. Token transactions might not seem that, first of all, from the external viewpoint, but through trials and errors, we have seen significant potential.

So we're going to change the billing system. And accordingly, the in-game virtual economic system and architecture will change. Instead of items being sold by game companies, the users will work to acquire those game items and transact those items amongst themselves, and this will be the largest change from the previous Mir 4. It will entail a significant change in gaming culture and the enjoyment players gain from playing our Mir 5.

As mentioned, it is critical Mir 5 be successful in North American market. Although we are a global game company, much of our revenues come from our Asian markets, but to secure larger success in North America is crucial.

[Operator]

[Interpreted] The next question will be presented by [ Sung Hoo Chae ] from Samsung Securities.

[Unknown Analyst]

[Interpreted] Two questions. First one has to do with Night Crows Global. In the first quarter, Night Crows Global made [indiscernible], and of course, we will be remiss if we do not mention the contribution of blockchain and tokenomics to the success of Night Crows Global. So how do you assess the level of perfection of the tokenomics for Mir 4 and Night Crows Global and how this tokenomics influence the popularity of the game? And what will be the future direction of tokenomics going forward?

Second question is about cost optimization. You've talked about marketing expenses for new launches and operating and revenue-linked expenses for new games. Can you elaborate on these plans?

[Kwan-Ho Park, executive]

[Interpreted] So the -- for tokenomics, we are still experimenting. We are still in the phase of trials and errors. And I believe during Mir 4's popularity, the market started to embrace the potential of tokenomics. And some responses with Night Crows is, "Is this it? Is this all we can get?" But we have a lot of plans and initiatives related to tokenomics, and we are still experimenting and in the phase of trials and errors.

So going forward, currently, the tokenomics, the architecture does not build in a way that the code token will continue to increase as we focus more on stabilization. But I strongly believe the game popularity should be linked to the increase in the token prices, and the architecture should be as such.

So -- and I believe the tokenomics have a sizable influence on the popularity of game because users start to play this game with some level of expectation regarding tokenomics. So it definitely has marketing effect. Even when the income from the tokenomics is not as great, sometimes gamers stay with the game because they like the gameplay, so -- as we can see from the case of Night Crows Global tokenomics and the potential for gain assets of good marketing vehicle for the game success. And if [ tokenomics ] are engineered to go up along with the popularity of the game, the impact will be greater in the future.

And as I've mentioned, WEMIX PLAY still is initial phase of growth as a platform. And I believe Mir 4's success largely tapped into the power of Mir IP for its success, but Night Crows have brought a lot of users. And I believe this is attributable to the power and capability of WEMIX PLAY as a platform. So the platform should continue to grow, and the tokenomics will continue to grow as well.

Going to the second question regarding cost optimization. The approach we have is twofold. First, we have been using a lot of external and outsourced resources as we embarked on expansionary policy and business execution. But to a certain extent, there was excess. As we have already built the system internally, now we're going to focus on in-house capability and strategy of [indiscernible] internal resources.

And communication expenses are somewhat excessive as well. So we are going to optimize the operation of servers. And we're going to also bring optimization to cost of goods sold because as part of WEMIX PLAY, the platform, we are going to -- and we do have plans to develop settlement and payment system. As is well known, Apple and Google builds quite a bit of commission from all the game players, hurting operating incomes of those game companies. So as we have tokenomics and WEMIX PLAY as our platform, we will be have -- we'll be able to have some different payment platform that we can avoid these hefty commission fees to the Apple and Google.

And we do have a lot of plans related to WEMIX PLAY. Although not all payments will be made on our payment system, it will still bring improvement to cost of goods sold. And so far, our WEMIX PLAY investments were somewhat aggressive to a certain extent. So we are going to now focus and select and focus on WEMIX PLAY, our platform, and Wepublic, the community. Wepublic is not as well known as WEMIX PLAY right now, but we're going to put together some events for the second half of this year and earlier next year to share with you our future vision.

[Operator]

[Interpreted] The next question will be presented by Yeji Yoon from HI Investments & Securities.

[Yeji Yoon, analyst]

[Interpreted] Two questions. First one has to do with making MADNGINE consolidated subsidiary. You mentioned that it will be done within the year previously. Is there any change to the schedule?

Second question is about new console FPS game. What are the differentiation it has against other games available in the market?

[Kwan-Ho Park, executive]

[Interpreted] As I've mentioned in the General Shareholders' Meeting, if possible, we will look to incorporate MADNGINE within the year. But we only think the procedure might take more time than expected. So it doesn't indicate there is any change to the plan.

I'm just mentioning the procedure can take more time than originally projected, but without MADNGINE, still, we believe this year's performance will be -- can be better than last year. Of course, we cannot, of course, definitively project the future.

Turning to the second question. We are currently preparing FPS game. And regarding gameability and differentiation from other games like [ Battleground ] and the target that we have. Because the Russian-Ukraine war has been featured in different videos in YouTube, people are exposed to real-life action of rifle squads fighting in trench wars and city battlefield. So whereas previous and past FPS was game took place in imagination, currently, people are exposed to a real-life actual battleground and battlefield.

So we are more inspired by this realistic approach to battlefield. But of course, it will not be all too serious because we're going to follow game [indiscernible], you put your life on the line in an actual war, but in this game, you're going to be using items for fun gameplay.

But look- and feel-wise, it is more life-like, and it will have also very laugh-out-loud moments as gamers engage in this gameplay. And in the market, there aren't a lot of FPS games that are widely successful, and nobody can guarantee the success of certain game, but you will definitely feel differentiation when you look at the game's look and feel.

And the game screens and the look and feel is more inspired by real-life battlefield and the people exposure to these actual scenes. But the game content will not be too serious. It will be also amusing, and it will also engage different strategic moves. So it's a very fun -- great game to play.

[Operator]

[Interpreted] The next question will be presented by [ Ho Jin Jung ] from NH Investment & Securities.

[Unknown Analyst]

[Interpreted] Two questions. First one, can you share up-to-date Q2 results of Night Crows Global and the ratio of PC and mobile business of the game? As we see the traffic to WEMIX PLAY, I think April results are slightly better than that of March. So can you share with us second quarter results?

[Kwan-Ho Park, executive]

[Interpreted] So mostly for games, initial payment is larger, and the revenue continuously stabilize as it adds up days and months. But I'm not saying the Q2 results are negative. But our approach is not to reduce the longevity of game by excessively creating initial payments or initial revenues. This is something that I have always taken an issue with. I didn't like this approach. So, so far, the Night Crows Global is doing very well in the second quarter, and I believe the longevity is even better in the global market than in Korea.

The breakdown between PC and mobile, the detailed data is not something that we disclose, so please understand. But on a higher level, PC and web payment ratio is larger than mobile.

[Unknown Executive]

[Interpreted] If there is no further question, we will conclude the 2024 Q1 earnings call and the Q&A session here. Thank you for participating in today's call. If you have any further inquiries, please contact IR division. Thank you.

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