Wemade Co Ltd

KOSDAQ:112040

Earnings Call Analysis

Wemade Reports Growth in Revenue Amid Strategic Changes and Upcoming Game Launches

In the second quarter of 2024, Wemade achieved revenue of KRW 171.4 billion, marking a 6% growth from the previous quarter and 8% year-on-year. Despite narrowing operating losses to KRW 24.1 billion, the company anticipates revenue recovery in the second half due to new blockchain services. Additionally, licensing revenue surged by 64% quarter-on-quarter, driven by Mir IP agreements. Looking forward, the launch of 'Legend of Ymir' is set for late 2024, while expectations for the Chinese market's 'Mir 4' remain high. The company is focused on optimizing costs and expanding its game portfolio to enhance profitability.

A Positive Revenue Trajectory

In the second quarter of fiscal year 2024, Wemade recorded a revenue of KRW 171.4 billion, representing a 6% increase from the previous quarter and an 8% increase year-over-year. This growth is underscored by the strong performance of 'Night Crows Global', which alone contributed KRW 86.2 billion to the quarter's revenue. This performance is notable as it follows the game’s launch in March and benefits from content updates and marketing strategies which helped maintain user engagement.

Managing Losses and Operating Costs

Despite generating higher revenue, Wemade reported an operating loss of KRW 24.1 billion. However, it is worth noting that this loss has been reducing consistently from previous quarters, indicative of the company's efforts in cost management. Total operating expenses saw a significant decline due to strategic moves to internalize some development activities and a notable 64% reduction in outsourcing costs (down KRW 8.8 billion) compared to the previous quarter, suggesting effective cost optimization strategies.

A Shift in Blockchain Strategy

Revenue from the blockchain segment has seen a decline as the company realigns its strategy in this area. However, there are optimistic expectations of recovering revenue in the second half of the year, attributed to the launch of new services like WeMix Pay. This aligns with the company's plan to enhance user engagement and drive the utility of their WeMix ecosystem, which is crucial for future growth.

Mir IP Licensing Growth

A bright spot in Wemade's revenue mix is the licensing income, which increased 64% quarter-over-quarter to KRW 1.7 billion. The company signed new agreements to license its Mir intellectual property, particularly in markets outside of China. These licensing agreements are expected to enhance profitability as they leverage the success of Mir 4 Global.

Future Expectations and Game Releases

Looking ahead, the company is preparing for the launch of 'Legend of Ymir', which is being developed in-house and expected to be launched by the end of this year. This new title incorporates blockchain technology, aiming to provide a unique gaming experience and strong market performance. Additionally, there are plans for over 10 new titles slated for release in the second half of the year, which is expected to further boost revenues and recalibrate the performance metrics upwards.

Optimism for Upcoming Games

The management expressed high expectations for 'Legend of Ymir', bolstered by positive feedback from playtests and focused group interviews. The unique incorporation of blockchain technology is anticipated to sustain item values within the game over time, distinguishing 'Ymir' in a competitive market. Furthermore, partnerships like that with The9 aim to create innovative gaming business models, particularly for the Chinese market with 'Mir M'.

Engagement with Investors and Market Confidence

The management reassured investors during the earnings call about the stability of their agreements, citing strong relationships and assured financial transactions regardless of ongoing litigations. This commitment to transparency and growth signals the company's strategic planning which aims to enhance investor confidence.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning and good evening. Thank you all for joining the conference call for the Wemade and Wemade Max earnings results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions]

Now we will begin the presentation on Wemade and Wemade Max second quarter of fiscal year 2024 earnings results.

[Unknown Executive]

Hello, this is [ Soo-rae Han ] of the Wemade IR division. Thank you for joining the 2024 Q2 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 Corporate Finance Division.

We'll start with the presentation of FY '24 Q2 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 Q2 of 2024 is provided for the convenience of the investors without [ completing ] the external auditors with you. 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 Q2 results presentation material posted on our website.

Now Senior Managing Director, Sang-Won Kim, will provide a review of the second quarter business results.

[Sang-Won Kim, executive]

Hello. This is Sang-Won Kim from the IR division of Wemade. I would like to share with you the key business results for the second quarter of 2024.

In the second quarter of 2024, Wemade revenue reached KRW 171.4 billion, up 6% quarter-on-quarter and 8% year-on-year. Operating loss was KRW 24.1 billion, but the loss narrowed consistently from the previous quarter.

In terms of nonoperating income, gain on valuation of derivative instruments related to convertible bonds, which share price change was reflected in the results of net income of KRW 400 million and KRW 4.1 billion in controlling interest net income, so [ winning back to back ].

Q2 revenue increased Q-o-Q despite the stabilization in sales from our existing games, thanks to the full quarter effect of stronger performance of Night Crows Global, which launched on March 12. Q2 revenue of Night Crows Global was KRW 86.2 billion. And as of June, the pace of monthly stabilization slowed down, thanks to the 100-day anniversary event and World Dungeon content update. Building on solid user metrics, we are striving to make the game a long-running success through user-friendly game services and major content updates, such as Class Change and Crusade.

Blockchain revenue decreased in the quarter and as our blockchain business has been going through overall realignment. We expect the revenue to be back on a growth trajectory in the second half with the launch of new services, such as WeMix Pay.

Q2 license revenue stood at KRW 1.7 billion, up 64% Q-o-Q, reflecting new agreements to licensing Mir IP outside of China. Apart from the Mir IP license agreement signed with ActozSoft in August for the Chinese market, we are making efforts to expand the Mir IP license business in both domestic and the global regions based on the success of Mir 4 Global. This, we expect, will drive stronger sales and profitability in the license business going forward.

Regarding operating expenses, we talked about cost optimization on our Q1 earnings call, and our efforts began to pay off in the second quarter.

First, operating expenses decreased significantly. We have previously developed services through outsourcing contract for rapid growth, but we have terminated some of them with an intention to select and focus and to internalize development and service capabilities. As a result, outsourcing costs decreased by KRW 8.8 billion, a 64% drop Q-o-Q. However, total service fees, which include our service costs, increased 1% Q-o-Q due to an increase in revenue-linked commissions, such as market fees for increased game sales. We project further decreases in outsourced service costs in the second half.

Second, we executed advertising expenses more efficiently despite the marketing expenses associated with the launch of new titles like Night Crows Global and Fantastic4 Baseball, advertising expenses decreased 3% Q-o-Q and 30% Y-o-Y in the second quarter.

Third, the labor costs declined 5% Q-o-Q due to a natural reduction in head count in line with the overall realignment of the business. We have granted stock options to key employees to motivate them and to encourage greater performance and recognized stock compensation expenses in accordance with accounting standards. Starting from Q4 of this year, stock compensation expenses were reduced significantly as recognition period is over.

In the second half, we will work to grow revenues with new titles and the Mir IP license fee from China and we'll continue with cost optimization, which we believe will translate into better results than the first half.

Moving on from the earnings review, I would like to now outline our business plan for the second half. We are accelerating our preparations for the Korean launch of Legend of Ymir, which we developed and will service ourselves. More details about the game and its launch will be provided soon through the TD site and videos that will be reduced in the near future.

Regarding the blockchain business in the first half, we have shared the direction and reorganization plans for the blockchain business on the principle of selection and focus. In the second half of the year, we are committed to show results by executing those plans we established.

First, we executed the [indiscernible] artwork in July, winning the majority of foundation's uncirculated WeMix reserves and introducing [indiscernible], which aligned our concerns about the future growth of WeMix circulation and marked the beginning of a healthy ecosystem of contractionary economy that the WEMIX Foundation aims for.

On July 16, we held WeMix Day to unveil WeMix Pay, one of our major future service plans. WeMix Pay is a service that allows users to pay with WeMix for game content available on WEMIX PLAY, our global blockchain gaming platform. It is designed to ensure that the growth of games has a positive impact on the WeMix ecosystem. We expect WeMix Pay to increase user benefits and expand the utility of WeMix, which will lift the value of WeMix. We are preparing to launch WeMix Pay in the second half, with a plan to introduce it first to our existing games, Night Crows Global and Mir 4 Global, followed by Legend of Ymir Global, Mir 5 and Meta Toy DragonZ.

The WEMIX PLAY platform is also gearing up to transform into a community-centric platform for blockchain games where gamers and content creators can interact together, share game tips and the latest wins, and watch developer AMA. We are planning to showcase this special community service in the second half. With the introduction of WeMix Pay and the new WEMIX PLAY, we will create an economic structure where the growth in blockchain games and the platform drives the growth of WeMix ecosystem.

The community platform Wepublic supports various communities by tapping into blockchain technologies for two aspects of ensuring transparency in decision-making and the flow of funds. We are looking to making it an open platform for everyone to use in 2025. By executing these business plans centered around WEMIX PLAY and WeMix Pay at Wepublic platform, we will do our utmost to achieve a steady increase in blockchain revenue.

This concludes Wemade Q2 2024 results and future plans, and I would like to now discuss key Q2 business outcomes of Wemade Max.

Wemade Max consolidated Q2 revenue was KRW 18.7 billion, up 8% Q-o-Q and 20% Y-o-Y, driven by the launch of new mobile casual game, Dragon BUURRP, and online game Flyff Universe, second anniversary world championship.

Operating [ expenses ] was KRW 1.3 billion due to advertising expenses for the new launch and sales-linked commissions, resulting in a net loss of KRW 1.2 billion. Controlling interest loss was KRW 900 million, turning into a loss from the previous quarter.

Overseas sales increased by 33.6% Q-o-Q, thanks to higher sales of existing games such as Flyff Universe and Silkroad. Domestic sales decreased by 8.6% Q-o-Q because of the stabilization of sales of existing games despite the contribution by new game Dragon BUURRP!

Operating expenses increased due to higher advertising expenses and sales-linked fees, but operating loss narrowed due to lower labor costs. In nonoperating income, the net loss widened on quarter, reflecting the base effect of the gain on the disposition of an associate company that was captured in the previous quarter.

Next, I would like to talk about Wemade Max plan for the release of new games in the second half, starting with preregistration for 3 games: The Legend of Mir 2: Destiny, Idle Dragon Princess, Dungeon and Merge. We plan to release more than 10 new titles, including mobile games like [ Sword World ]. As such, we expect a significant increase in new product releases compared to the first half of the year, which we believe will lead to improved performance.

[Unknown Executive]

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

[Operator]

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

[Hee-Seok Lim, analyst]

First, Ymir's Korean launch is imminent. So can you share with us your expectation and projection for the launch?

Second question is about the time line of launch of Mir M and Mir 4 in the Chinese market. Can you elaborate on the time line?

[Kwan-Ho Park, executive]

Regarding Ymir, we have recently conducted FGI tests with a number of hard core users and professional game YouTubers. And the game was really well received. And Ymir game applied blockchain [ syntaxing ] grammar. So key resources and items within the game has a mechanism of blockchain. So in the past, there was a little bit of misconception and skepticism regarding mistrust for the entire minting or circulation amount and the number of items the company will produce. But because of the blockchain technology, these skepticisms can be dispelled.

So basically, the items within the game are similar to the mechanism of token on the blockchain -- or the game token on the blockchain. So the circulation or the minting amount will be limited. Although the game items will not be traded outside of the game, but technically, it has the same mechanism as the token on the blockchain. Because of this unique attribute, the item value will not decrease as game service prolong. So this solves the structural problem of the past practice because Ymir has blockchain technology adopted to that.

So for example, the item that was generated or created for the first season will not be available in the second season, so that the value of the first season item will sustain. And we believe that the longer Ymir will be played for a longer period of time, the value of item will not depreciate, thanks to this unique nature of blockchain technology.

The quality of graphic and action received really high scores from this test. And regarding the expectation we have, we cannot specify the number, but we are going for the #1 in the market. And the time line for the launch of Ymir will be by the end of this year, early next year. But the main target is by the end of this year because we are making sure the game reaches the level of perfection rather than hastily launch the game.

Switching to the second question, as you know, the version number for Mir M is already out, so we are collaborating very actively with The9 and accelerating the pace for preparation. As you know, for the Chinese business, Mir M, the target is by the end of this year, and The9 is really aggressive on accelerating the pace. However, for Mir 4, we are still awaiting the issuance of version number, so we can talk about the time line when the version number comes out.

So the explanation about Ymir token was not as eloquent as I wished. But to give you an example, there was a special item of execution sword in the initial phase of Lineage game. So this special item sustained its value for the long period of time, and it was basically the success model of the game Lineage. And the application of blockchain and NFT mechanism to this game will bring the same attribute of those special items to Ymir.

[Operator]

[Operator Instructions] The following question will be presented by Jae-min Ahn from NH Investment & Securities.

[Jae-min Ahn, analyst]

I want to ask about the current status of Night Crows' performance in the third quarter.

[Kwan-Ho Park, executive]

For Night Crows Global, just like Night Crows for the domestic launch, after the initial 3 months since the launch, now the game is in for the stabilization phase. So the speed and pace of which is similar to Night Crows that is launched in Korea.

[Operator]

The following question will be presented by [ Jin Lee from Taejin Securities ].

[Unknown Analyst]

The launch time line of Legend of Ymir.

[Kwan-Ho Park, executive]

Internally, the target is by the year-end, but my principle is to ensure game to be successful with a very refined and a more perfect quality level. We are in the phase of applying final touches regarding blockchain technology to ensure detailed [ balance ] in the game. Again, Legend of Ymir, game-wise, received really good reviews and responses from our internal tests and external focused group tests, but the key differentiation of this game is incorporation of blockchain technology. So we are applying the final refining and final touches to the game. Again, the internal target is by the year-end.

[Operator]

The following question will be presented by Yeji Yoon from iM Securities.

[Yeji Yoon, analyst]

Two questions. You have indicated you have planned to additionally acquire shares of MADNGINE, the development house of the Night Crows. Was there any change to the plan?

Second question has to do with your expectation and projection of the launch of Mir 4 and Mir M in the Chinese market. Of course, we are still awaiting for the version number for Mir 4. But can you share the target that you have?

[Kwan-Ho Park, executive]

So regarding the plan for MADNGINE, the actions are on track. But I cannot really specify the time line because it involves permission from the FSC and other authorities.

Moving on to the second question. For Mir 4, we are still awaiting the version number. And for Mir M, Mir M will be launched in a new way. The business model will be quite unique. The9, although it is a Chinese company, is keenly interested in blockchain. And they have presented, too, a new business model using blockchain technology. And we thought it was really awesome. So we signed an agreement with The9. So the business model will be quite different from the existing form of game sales and game revenue. So we cannot reveal the specific number, but we have high expectations, and you will be able to see very new [ M business ] model.

[Operator]

The following question will be presented by [ Jieun Kim ] from Heungkuk Securities.

[Unknown Analyst]

You have mentioned the payment from the agreement with the [indiscernible] will be captured and recognized in the third quarter but vis-à-vis there was damages litigation underway. So would this impact the aforementioned recognition or the payment?

[Kwan-Ho Park, executive]

The recent court ruling has no impact at all. We have great relations with [indiscernible], the mother company of EXOS. And there is no probability of non-execution or nonpayment of the agreement. The business terms are really great, and we look forward to greater success.

[Unknown Executive]

If there is no further questions, we will draw to a close the Q&A session and earnings call of 2024 Q2 of Wemade and Wemade Max. Thank you for your attendance. And if you have further inquiries, please do not hesitate to contact IR division of Wemade. Thank you.