Wemade Co Ltd

KOSDAQ:112040

Earnings Call Transcript 2024-Q3

[Unknown Executive]

Hello. This is [ Tao-Mi Zhou ] from Wemade IR division. Thank you for joining the 2024 Q3 earnings call of Wemade and Wemade Max. We have with us 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 Q3 results by Senior Managing Director, Sang-Won Kim, which will be followed by a Q&A session.

The results of Q3 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 auditors. Please refer to the disclaimer from the Q3 results presentation material posted on our website. Now Senior Managing Director, Sang-Won Kim, will provide a review of third quarter business results.

[Sang-Won Kim, executive]

Hello. This is Sang-Won Kim from the IR division of Wemade. I'd like to share with you the tentative key business results of the third quarter of 2024. Q3 2024 revenue of Wemade was KRW 214.4 billion, up 25% Q-o-Q. Operating income stood at KRW 51.8 billion, turning back in black on quarter, driven by revenue growth and cost-cutting efforts. Nonoperating profit reflected a reduction in foreign currency translation gains due to lower exchange rate. This brought net income to KRW 35.9 billion and controlling interest net income stood at KRW 41.9 billion.

Let me briefly explain the revenue by business segment. First, in terms of game business, Night Crows Global showed a stabilizing trend in revenue and cumulative revenue of KRW 200 billion was reported by the third quarter since its launch in March. The combined revenue of Mir 4 Global and Mir 4 Korea increased Q-o-Q, confirming that the life cycle of Mir 4 game is well maintained.

Q3 license revenue was KRW 83.6 billion. With regard to license business, there were some changes to the Mir IP license agreement with ActozSoft for the Chinese market, which was signed in August last year. First, the counterparty to contract was changed from ActozSoft to Lansha, a subsidiary of ChuanQi Games from China.

Although the payment terms were modified from KRW 100 billion per year to KRW 50 billion every 6 months. As a result, we will receive the second year license fee balance of KRW 50 billion in the first quarter of 2024. As a result of these changes and the terms and conditions of Mir IP license agreement, KRW 50 billion in license revenue was recognized in the third quarter. Additionally, new license revenues of KRW 32.7 billion was generated from Mir IP license agreements with overseas game companies for non-Chinese markets.

Q3 blockchain revenue stood at KRW 1.1 billion, showing a decline Q-o-Q due to decreased transaction volume on the WEMIX platform as we reorganized our blockchain business. However, we expect it to be back on the growth trajectory with the introduction of WeMix Pay and onboarding of new blockchain games.

Operating expenses in the third quarter dropped 17% Q-o-Q and 15% Y-o-Y, showing reduction across the board, including in labor cost, revenue-linked expenses, communication expenses, including server costs, and advertising expenses. First, labor expenses decreased by 2% Q-o-Q and 10% Y-o-Y due to reduced headcount, particularly stock compensation expenses related to the accounting treatment of stock option granted to key employees will decrease approximately by KRW 8 billion in the fourth quarter and by KRW 10 billion from the first quarter of 2025, as the recognition period for that is over.

From this third quarter, the commission fee category was broken into 2 line items of revenue-linked expenses and other commission fees. Other commission fees exclusive of revenue-linked expenses decreased 37% Y-o-Y. And among them, cumulative outsourcing expenses from all 3 quarters of this year declined 31% Y-o-Y. Communication expenses, including server costs decreased 38% Y-o-Y and advertising expenses dropped 14% Q-o-Q and 15% Y-o-Y. Excluding some onetime expenses, we believe that the cost optimization we have been emphasizing since the beginning of the year is progressing as planned.

This concludes briefing on preliminary Q3 2024 results, and I would like to now discuss our business plans and outlook. Wemade has continued its trend of annual revenue growth since 2020, despite intensifying competition in the domestic and international game market. In particular, in 2024, we further solidified our position as a global leader in blockchain games through the successful launch of Night Crows Global, and laid the foundation for stronger future growth with the revamp in our blockchain business. We're looking to implement the following important business plans.

First, on September 11, we announced a share exchange plan to make MADNGINE, the developer of Night Crows, a wholly-owned subsidiary of Wemade Max. Through this equity exchange, MADNGINE will be brought in as a 100% consolidated subsidiary of Wemade Max, which will allow Wemade Group to further strengthen its game IP portfolio by adding a number of new titles MADNGINE is preparing. This will help us achieve further improvements in management efficiency and financial robustness.

Specific new game release plans include the launch of Midnight Walkers, a new extraction shooter developed by Oneway Ticket Studio, a subsidiary of MADNGINE, in the first quarter of 2025, followed by Night Crows 2, a sequel to Night Crows, slated for 2026. In addition, development of TAL, a console-based open-world RPG, has begun and is targeted for release in 2028. The inclusion of MADNGINE as a consolidated subsidiary will further enhance Wemade's position as a leader in the global gaming and blockchain gaming business and will be a major engine for growth for the new era of growth across a variety of game platforms and genres.

Secondly, our long-awaited new MMORPG masterpiece, Legend of Ymir, is scheduled for release in the first quarter of 2025. Boasting differentiated graphics built with Unreal Engine 5, Legend of Ymir will provide a completely new gameplay experience with 2 different types of combat content, basic growth content based on automatic combat mode, and active growth content that allows players to enjoy the fun and excitement of control and maneuver through manual combat.

In addition, the economic system of Legend of Ymir is based on the core principle of value preservation through symbiosis and introduces blockchain technology and blockchain game grammar to tackle the inflation issue in MMORPG's in-game economy. By utilizing the blockchain game grammar accumulated through Mir 4 Global and Night Crows Global, Legend of Ymir introduces a token system that can help maintain the value of items with a limited circulating supply. In addition, inspired by blockchain technology, unique numbers are assigned to top-level game items and their creation and transaction history are transparently disclosed to all players. Through this innovative and transparent in-game economic system, Legend of Ymir aims to provide a greater degree of freedom and fairness to game players and present a differentiating playing experience and a new game paradigm from existing MMORPGs.

As evidenced by the real-time concurrent user data available on the WEMIX PLAY website, Mir 4 Global released in August 2021 and Night Crows Global released in March 2024 have average daily concurrent users of over 200,000 and 300,000, respectively. They are established as long-running successes with the combined average daily concurrent users of over 500,000. This user traffic is comparable to the top grossing games, not only in the blockchain game market, but also in the broader global game market. Through these achievements and experiences, Wemade has secured global competitiveness and leadership in designing and operating a blockchain game economy with large-scale user participation.

Building on this foundation, we are working to launch the blockchain version of Legend of Ymir in 2025 on the heels of its success in Korea, continuing our legacy of blockchain game success following Mir 4 Global and Night Crows Global. We will do our utmost to usher in the era of 1 million daily average concurrent users in the global game market.

In the blockchain business, we revamped WEMIX PLAY as a community-centered platform in the third quarter. To create a user-centric platform based on the strength of active communication, we added a WEMIX PLAY feed, where anyone can create posts. We expect the renewal will uplift the user traffic going forward. At the same time, we are strengthening the platform's functionality through the introduction of WeMix Pay and laying the groundwork for the larger user acquisition with new games onboarded.

This concludes the report on the third quarter results of Wemade, and I would like to now discuss the results of Wemade Max. Wemade Max's consolidated revenue for the third quarter was KRW 19 billion, up 2% Q-o-Q and 3% Y-o-Y, driven by the launch of the Legend of Mir 2 Destiny, a new mobile MMORPG, and increased loyalty revenues from Silkroad Online. Operating loss was KRW 2.1 billion and net loss was KRW 4.8 billion.

Overseas sales increased 27% Q-o-Q due to the effect of the third anniversary event of Mir 4 Global and higher royalty revenues from Silkroad Online. And domestic sales decreased 22% on quarter due to the stabilization of revenues of existing games despite the contribution made by a new title such as the Legend of Mir 2 Destiny. Operating expenses increased Q-o-Q due to rise in advertising expenses and the hiring of development staff for new game launches. Nonoperating loss expanded compared to the previous quarter due to impairment of investments in associates and losses on foreign currency translation due to exchange rate fluctuation.

Next, I would like to discuss Wemade Max's business plan for the fourth quarter and 2025. As I mentioned earlier, Wemade Max is in the process of equity exchange with MADNGINE, the developer behind the success of Night Crows. And we hope to finalize the exchange by the year-end, making it a 100% consolidated subsidiary. This will increase the cash availability of both companies, freeing up investment resources and bringing together a portfolio of games in diverse genres with reliable sales potential, serving as a strong engine for mid- to long-term growth.

Starting with the release of Midnight Walkers in the first quarter of 2025, more than 10 new titles, including Lost Sword and Windrunner RPG will be released sequentially over the next year. After the successful completion of the share exchange with MADNGINE by the end of the year, we will strive to achieve a successful earnings turnaround in 2025.

With that, I would like to conclude the presentation of business results of Wemade and Wemade Max for the third quarter of 2024. And now we're going to open the floor for questions and answers.

[Unknown Executive]

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

[Hee-Seok Lim, analyst]

I have 2 questions. First, the existing license agreement is KRW 50 billion biannually. And this, I understand, is with ActozSoft for exclusive rights of Mir 2 and 3 for the Chinese market. And in the presentation, you mentioned additional IP agreement. So can we consider this non-one-off agreement that can be recurring in the future? Second question has to do with company's expectation for the Legend of Ymir and the time frame for Legend of Ymir Global launches.

[Sang-Won Kim, executive]

Thank you for the questions. As I mentioned in the presentation, there was a new license agreement in the third quarter. Like you have mentioned, the existing license with ActozSoft is for Mir 2 and Mir 3 in the Chinese market. And this new agreement with another overseas game company is for markets outside of China and the pertinent IP is Mir IP. As for the follow-up question of the nature of the agreement being one-off, the duration of the agreement is not multiyear, but we are actively pursuing IP business with Mir IP. So I can safely say there is further possibility of additional license agreements.

So as far as our company's expectation for Legend of Ymir, I confidently say we are very positive about the outlook. This is not a substantiated confidence. Since 2022 -- since 2020, we've been launching Mir 4 and Mir 4 Global, Night Crows and Night Crows Global. Although the IPs are only 2, launching a title in the global market is almost as difficult as launching a completely new title requiring high level of preparation. So every year, we've been launching blockbuster MMORPGs, and we have accumulated ample experience and executive capabilities.

So we have high expectation and high confidence that is well grounded and well supported. Particularly with Legend of Ymir, last year, we showcased 15-minute playable version of Legend of Ymir at last year's G-STAR. Although 15 minutes are not enough time to capture the vast content of MMORPG, but it surely provided a flavor of differentiated graphic and player experience to the users, and the reception was outstanding reception and very positive, well evidenced by feedback from the users on the YouTube and other social platforms.

Additionally, we are releasing videos of Legend of Ymir through Directors Preview program and content on our YouTube channel. And Legend of Ymir offers very unique dual track growth modes, one of basic growth mode with automatic combat and active growth mode with the maneuver that is manually done. So this is not an approach often tried out and attempted in other MMORPGs. So offering a very differentiated gameplay experience to the users.

And tapping into our experience of operating blockchain games successfully in the global market, we're going to apply the blockchain games' grammar and syntax to the Korean version, the core to which is to offer the opportunity for all the users to engage in different content creation. So instead of just focusing on the content for a handful of high paid and high consumption users, we are seeking prosperity based on seen by office. And this, we believe, will help us overcome the limitation of existing MMORPG games. And bringing in blockchain technologies to the game items, we're going to assign unique numbers to game items, through which transaction of game items will be diverged and disclosed transparently to all users. So this will again bring more transparency and the level of experience that is on a completely different level.

And regarding Ymir in the Korean version, of course, it cannot be categorized as blockchain game per se, but it provides Korean user base to experience a similar gameplay mechanism. And it will lead to the potential of generating large-scale user traffic that is seen in Mir 4 Global and Night Crows Global. And the YouTube content of Directors Preview has generated a lion's share of voices on different social networks. Although we haven't disclosed any pre-registration plans yet, the level of attention is remarkably high. So this is, again, a good evidence for our solid expectation for Ymir's performance.

And the final question you asked was when is the time frame of Ymir Global launches. Usually, it takes about 9 months after launching a new title to get ready to launch blockchain version of it. So after the launch of Ymir, we expect the Ymir Global launch will come in within next year.

[Unknown Executive]

The following question will be presented by Jihyun Kim from Heungkuk Securities.

[Jihyun Kim, analyst]

I have 2 questions. So can you share more details about the version number issues in China? So I believe the vague time frame of issuance of version number in the Chinese market is on the horizon. So can you share more details? And second question has to do with cost-cutting efforts in 2025. I can see more potential for cost reduction. So can you explain further details centering around the labor cost reduction and of the time point when those benefits will be realized?

[Sang-Won Kim, executive]

Yes. Thank you for the question. We already have a version number for Mir M, but the version number for Mir 4 Global -- Mir 4 is not yet out. And all the procedures that is required for the acceptance of version number has already been completed. It's not that we are experiencing any issues or there are any reasons for delay. But it is true that it's quite unpredictable when the version numbers will be granted. But as we see it, it can come out any time, and we are going to closely collaborate with the publisher, so that the service can be smoothly initiated as soon as we get the version number.

Regarding the second question about the expenses, as I've mentioned in the presentation, in third quarter, we are seeing expenses reduction Y-o-Y across the board in a very well-distributed manner and we are reaching high level of efficiency compared to the past. And the cost reduction is not done in a contrived manner. It is naturally following our reorganization of different business divisions. Labor costs decreased 10% Y-o-Y, particularly because of the decrease in the necessity for the compensation for the stock option.

The related expenses decreased sizably in the fourth quarter -- it will decrease in the fourth quarter. And it has already decreased KRW 8 billion Q-o-Q. And starting from the first quarter of next year, there will be a reduction of additional KRW 10 billion every quarter. And considering the total volume of labor cost, we are going to experience sizable and significant reduction in the labor cost in the next year.

To add, we used to have only one line item of commission fees, but we are bringing more granularity to that expenses category, breaking it into 2 different lines of revenue-linked expenses and other commission fees. Like I've mentioned in the presentation, other commission fees saw 37% of decrease Y-o-Y. And particularly the cost optimization has been done in outsourcing expenses, which reduced by 32%. So across the board, we are bringing more efficiency to overall cost structure.

[Unknown Executive]

With no further questions, we would like to draw to a close earnings call of Wemade and Wemade Max for third quarter 2024. Thank you for joining us. And should you have any additional inquiries, please do not hesitate to contact IR division.

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