Wemade Co Ltd

KOSDAQ:112040

Earnings Call Transcript 2023-Q2

[Operator]

Hello, I would like to thank you for joining us for this conference call. The conference call for the Fiscal Year 2023 Q2 Earnings Results of Wemade and Wemade Max will commence. We will have presentation from Wemade and Wemade Max, which will be followed by a Q&A session.

[Operator Instructions].

We'll now start the presentation.

[Unknown Executive]

Hello, this is [indiscernible] of Wemade Strategic Communications Division. Thank you for joining the 2023 Q2 Earnings Call of Wemade and Wemade Max. We have with us CEO, Henry Chang; Senior Managing Director, Sang-Won Kim of Strategic Communications Division and the Director [indiscernible] of the Corporate Financial Division.

We'll start with the opening remarks by Wemade CEO, Henry Chang and the presentation of FY '23 Q2 results by Senior Managing Directors, Sang-Won Kim, which will be followed by a Q&A session.

The results of Q2 of 2023 is provided for the convenience of the investors without completing the external auditor's review, and it is subject to change due to accounting audits and instructions of the Financial Services Commission. Please be advised to refer to the disclaimer from the Q2 results presentation material posted on our website.

Now CEO, Henry Chang will give us an opening address.

[Henry Chang, executive]

Hello. This is Henry Chang, CEO of Wemade. Thank you for joining us for Wemade 2023 Q2 earnings call. I would like to start today's call with a few comments on the Chinese game market. As you are well aware, the Chinese game market has been stagnant for the past few years. Now it is facing a favorable business environment in many ways.

First and foremost, the Chinese government has declared its commitment to promoting the game industry, and this has been a major driving force behind the industry's turnaround. China, the biggest -- the largest game market in the world has reopened and is poised for growth. We have a long history of doing business in China, starting with the official launch of The Legend of Mir 2 in 2001. In 2016, the Legend of Mir 2, Blood Legend M became the #1 mobile game in China. However, it goes without saying that success also accompanies challenges such as patent infringements and lawsuits. These were unique and special circumstances, which equipped Wemade with unparalleled competitiveness to take on the game market and industry in China.

By leveraging the growing opportunities in China, we are resolving past disputes and are continuously laying the groundwork to prepare ourselves for the future. As a company trying to do our business all of such disputes were for this business and our efforts to normalize the business operations. Now is the momentum, which is the accumulation of all such efforts with our efforts and business in China. We expect to be able to share more of what we are working on and wrapping up to the market in the near future.

I extend my sincere appreciation to all of you who have endured the time to wait for Wemade's achievements, conquest and challenges. Thank you.

[Sang-Won Kim, executive]

Hello. This is Sang-Won Kim from the Strategic Communications Division of Wemade. I would like to brief you on our major business achievements in the second quarter of 2023 and our current status and plans with third quarter.

On April 27, Night Crows, a new MMORPG game developed by Mad Engine and serviced by us was released in Korea and achieved great results in rank #1 top grossing in Korea on both Google Play Store and Apple App Store. With its excellent gameplay and user-friendly services, it is now positioned as a long-running hit after 100 days of service. We're also preparing for the global launch of Night Crows. The blockchain game Night Crows Global, which is targeted for the release within this year is expected to perform very well in the global market based on its proven performance in the Korean market.

As for our upcoming games, we and our subsidiaries are preparing a variety of games in various genres including the epic MMORPG game Legend of Ymir, which depicts a unique and magnificent world based on Norse mythology as well as SNG game, Love Recipe, the MMORPG game, Legend of Mir 2:Fate and the Collectible RPG game, Valkyrious and [indiscernible] puzzle RPG [indiscernible].

At the same time, we are expanding our cooperation with global partners in the various regions, including the Middle East to expand the WEMIX 3.0 ecosystem. And in the second quarter, we signed MOUs with MISA, the Saudi Arabian Ministry of Investment and Hub71,a global tech organization in the United Arab Emirates for mutual cooperation. This will help us strengthen our business capabilities in the Middle East and North Africa or MENA region.

With Microsoft, our strategic investor, we are discussing various cooperation plans, including the launch of console FPS games tentatively named This Means War. In order to expand the WEMIX platform, enhance WEMIX accessibility, we are launching various blockchain services and also increasing the number of WEMIX PLAY listed exchanges.

In addition, on WEMIX Play since Q2, 8 new blockchain games have been onboarded. As a result of these efforts, on July 13, WEMIX was selected one of the Top 100 new Brand 2023 announced by Clarivate Analytics, a global information service provider, which was the first recognition received by the Korean IT industry.

The company is also continuing our efforts to strengthen ESG management. The company has established and implemented an ESG management strategy containing core values for sustainable growth and the creation for the future ecosystem. We published our first ESG related reports The 2022 Sustainability Report. As a leading blockchain technology company, we will continue to make efforts to improve management transparency and fulfill our social roles and responsibilities.

Next, I will briefly talk about Wemade's preliminary results on a consolidated basis for Q2 of 2023. The revenue in Q2 recorded KRW 159.3 billion, reflecting the successful results and performance of the new MMORPG game, Night Crows. It was the highest quarterly revenue since the company's establishment.

Operating expenses recorded KRW 199.6 billion, up 42% Q-o-Q due to the increased advertising expenses for Night Crows and revenue-linked service fees. As a result, Q2 operating income recorded an operating loss of KRW 40.3 billion with a loss down Q-o-Q.

Net income recorded a net loss of KRW 29.4 billion, reflecting income tax. For details on the earnings results, such as the revenue by business region, please refer to the earnings data uploaded on our website. That concludes the presentation on Wemade's preliminary results for Q2 2023.

Now allow me to move on to Wemade Max's preliminary results for Q2 of 2023. Wemade Max's Q2 consolidated revenue recorded KRW 15.6 billion, down Q-o-Q due to a decrease in royalty sales and a stabilization of sales from existing games such as Mir 4 and Mir 4 Global.

Operating expenses decreased by 3% Q-o-Q to KRW 14.7 billion due to a drop in advertising expenses and the commission payments. As a result, operating income recorded KRW 900 million, a decrease Q-o-Q. Net income recorded KRW 800 million down Q-o-Q.

With that, the presentation on Wemade and Wemade Max's preliminary results for Q2 of 2023 is concluded, and we will now move on to Q&A.

[Operator]

[Operator Instructions] The first question will be asked by Mr. Hee-Seok Lim from Mirae Asset Securities.

[Hee-Seok Lim, analyst]

You emphasized your message about the Chinese market, Mir 4 and Mir M, any preparation for the official launch in the Chinese market. Can you elaborate on the details of those preparations?

Second question is revenues of Night Crows and the indicators trends for the Night Crows.

[Unknown Executive]

Yes. Thank you for the question. Regarding the Chinese market, there are 3 pronged activities that will be underway soon. One is [indiscernible] because of the litigation. We were not able to harness Legend of Mir 2 IP, and we're going to actively pursue the utilization of that IP now. And the second line of activities is Mir M and Mir 4 launch in the Chinese market, as you mentioned. And the third one is to do with the past. So how we're going to streamline and iron out all the disputes we have experienced so far. So these are the 3 main areas.

So the co-holder of the IP and the Chinese publishers and shareholders, all these stakeholders need to be communicated with. We have to work with them for consensus, and we need to work with them to create a win-win structure. And with those stakeholders, I can assure you, and I've already mentioned that we have reached a certain level of consensus. On the basis of the consensus, we are taking the boxes to get things done.

So how we're going to pursue the legend of Mir 2 license. We have the groundwork done already. And in the second area, we -- regarding the launch of Mir 4 and Mir M, the Mir is very famous and well-known IP. We commenced our development with the Chinese market in mind. So we do not have high requirement for the localization. So we can decide publisher and we can gain the version number, and we can start servicing and that will be the processes we're going to go through.

So from the signing of agreement with the publisher to the version number, things can go with quite a bit of speed. And we have streamlined a lot of things that happened in the past. A final ruling came out for those litigations. We're going to iron out the details with how to deal with those rulings. So centering around ‘Mir’ IP, which is our biggest forte, the business will be continued, and we will also conduct other activities to ensure success in the Chinese market.

[Unknown Executive]

So quarterly revenue of Night Crows has already been shared with you. You -- so I believe you're asking a question about the revenue trend in the third quarter. So in July -- so the June was the highest grossing month for us. And in July, the daily revenue is around KRW 0.9 billion, slightly below KRW 1 billion. And in August, the trend is sustaining.

So internally, if we maintain our great service -- servicing, I believe Night Crows will fully unleash its potential in the Korean market. That is on par with our expectation. And even with the new launches, that performance can sustain. So we'll [ turn ] that goal. And I believe it is a feasible goal.

[Operator]

There are currently no participants with questions. [Operator Instructions]

The next question will be from NH Investment & Securities, Jae-min Ahn.

[Jae-min Ahn, analyst]

This is Jae-min Ahn from NH Investment & Securities. So compared to previous expectations, I think the income contribution was less compared to the growth in revenue. Labor cost seems to be on the rise in the second half and advertising expenses, marketing as well. Expenses and your expectations for the earnings in the future would be much appreciated if you could provide some color.

[Unknown Executive]

Thank you for the question. In terms of revenue growth there is the contribution margin, of course, that we need to think about. For Night Crows, there is an external developer. They're not subject to consolidation. We only count the publisher's number. So only part of the revenue is counted in our contribution margin. So that's why we don't really have a significant jump in the contribution margin part.

Secondly, there are 2 major expenses when we have opening or release. First is marketing. There's massive marketing budget that's allocated. And another is because there are a lot of users at the early stages of release. There's a lot of system and infra-related expenses that have to be set aside.

For marketing and system infrastructure-related expenses. Marketing expenses, they have gone down significantly since the open. So there will be an improvement in profit accordingly. And on the system infrastructure side, the traffic is now only trying to respond to the reserves that are still in the game. So what we save there will also contribute to better margins. And on top of that, with now only counting the publisher's number, in the long term, we are trying to look at how we can reform the structure so that we can have better count of the revenue into our numbers. So the margin will get better even with the current revenue levels.

And of course if we look beyond a little bit more into the time of this year, the Global version will be released. So our labor expenses, there will not be much increase in our fixed costs. There will be sales leverage that will materialize. So in the long term, margin will improve, and we believe that in the long run, there will be a better improvement in our margin trend.

[Operator]

We'll now take next question. No one has request for floor right now. [Operator Instructions]

Once again, no one has requested to ask a question. We will hold for a second until there is another request for the floor.

If there is no further questions, we will conclude the Q&A session here. If you have any further inquiries, please contact the Communication Division.

We'll now ask CEO, Henry Chang, to offer finishing comments. Please go ahead, sir.

[Henry Chang, executive]

In the next quarter, we'll make all our efforts to report better earnings results. In the next conference call and even before that earnings call if we have any updates, we will communicate accordingly with the market. Thank you very much.

[Operator]

With that, we will conclude the earnings conference call for 2023 Q2 for Wemade and Wemade Max.

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