NCSOFT Corp

KRX:036570

Earnings Call Transcript 2023-Q2

[Operator]

[Foreign Language] Good morning, and good evening. Thank you all for joining this conference call. And now we will begin the conference call of the Fiscal Year 2023 Second Quarter Earnings Results by NCSOFT. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now, we shall commence the presentation by NCSOFT.

[Jason Lee, executive]

[Interpreted] Good morning. This is Jason Lee, Head of IR at NCSOFT. Thank you for participating in this conference call for the second quarter of 2023.

Now, let me begin my presentation with the earnings highlights. Second quarter sales totaled KRW 440.2 billion, representing a decrease of 8% Q-o-Q and 30% Y-o-Y, stemming from a decline in revenue from Lineage W and Lineage 2M. Operating profit posted KRW 35.3 billion, down by 57% Q-o-Q and 71% Y-o-Y driven by a weaker top line and an increase in marketing and other expenses. Pretax income was KRW 39.1 billion and net income, KRW 30.5 billion, representing a Q-o-Q decline of 72% and 73%, respectively, and Y-o-Y decrease of 76% and 74% each.

Next, let me discuss the sales of each game. Lineage M recorded sales of KRW 127.8 billion, a drop of 2% versus the previous quarter. The game's unique fun and high-quality updates enabled the title to achieve solid performance amid a highly competitive environment, confirming once again Lineage M's, position as a top ranking title in Korea.

Lineage W sales continued to moderate at a lower level, coming in at KRW 102.8 billion, a drop of 16% Q-o-Q due to multiple new game launches in the Korean market. Lineage 2M also was somewhat impacted by the launch of similar MMORPGs, recording sales of KRW 62 billion or a decrease of 15% quarter-over-quarter.

Blade & Soul 2 posted KRW 4.3 billion, which is a drop of 15% quarter-over-quarter. Blade & Soul 2 is scheduled to launch in Japan and Taiwan within the third quarter, and the company is taking the user feedback collected across the past 2 years of operations in Korea to enhance the contents of the game for the upcoming launch.

The sales of the 5 PC online games together was KRW 88.2 billion, that is 4% lower than the previous quarter. Guild Wars 2 is planning to release its fourth expansion pack on August 22nd. After the release, we are planning to supply new contents on a regular basis.

Lastly, royalty totaled KRW 36.3 billion or a decline of 14% Q-o-Q. Lineage M Taiwan royalty showed a slight increase, but royalty from other games decreased. Guild Wars 2 China royalty dropped due to the high base effect of the first quarter during which the title recorded its highest quarterly sales, but China continues to show a strong level of user traffic.

Next, let me discuss expenses. Second quarter operating expenses totaled KRW 405 billion, which is higher by 2% versus the previous quarter, but down by 20% year-over-year. To break it down by line item, labor cost was KRW 208.5 billion, less by 2% Q-o-Q, but up by 1% Y-o-Y. Marketing came in at KRW 12.2 billion, which is an increase of 152% quarter-on-quarter due to the advertisement for our [ across the board ] updates and promotions for live games. But as our marketing activities were more efficient, the spend represented a drop of 80% year-over-year.

Depreciation was similar to the previous quarter at KRW 27.9 billion. Variable costs and other expenses combined was KRW 156.4 billion, which is an increase of 3% versus the first quarter. Distribution fees declined, as mobile sales decreased, but other fees and other cost increased.

The company's next PC and console-based MMORPG Throne and Liberty or TL held their local test last May. We were able to collect a wide range of feedback from users, who actually experienced the game. The company promptly engaged in content improvements for TL, which actively reflected the feedback received to ensure we can present our users with a gameplay experience fitted for a large-scale PC game. To ensure, we created an optimized global service environment for TL, we are preparing to host a user test with Amazon Games, where details on the plans and event will be provided by our global publisher, Amazon Games.

In addition, the company is also continuing preparations for the global launch of 4 new MMO games, non-MMO games. The first of the lineup will be PUZZUP, a casual puzzle game to be launched in the third quarter. Following in the first half of next year, will be Battle Crush, a brutal -- brawl style battle acting game and collectible RPG Blade & Soul S. Then in the second half, will come the RTS game, Project G.

The company has made some adjustments to its mobile game launch pipeline. We will use this time to further enhance the quality of each game and fully prepared to ensure we can outperform in the global market.

This wraps up my presentation on the second quarter of 2023, and I hope to come back in the next quarter with better news. Thank you.

[Operator]

[Foreign Language] [Operator Instructions] The first question will be provided by Eric Cha from Goldman Sachs.

[Minuh Cha, analyst]

[Interpreted] There are 2 questions that I would like to ask you. During your presentation, just now, you did provide an update of your overall pipeline going forward. And as you have mentioned, it does seem to be that there are some delays that you have baked in, in terms of your mobile game launch schedule. So if you could elaborate a bit about the reasons behind that in more detail, that would be appreciated.

And in addition to that, for the AION 2 pipeline, this is something that we also expect would be in the overall pipeline for your launches going forward. Does this mean that for AION 2 that the overall launch date will also get pushed back. I think that a lot of attention right now is surrounding the Game TL or Throne and Liberty. And I do think that for the global CBT, the starting date would have to be at around August or September for you to be able to take that user feedback and then reflect it into the game and also be able to launch within the year. So with that coming, is this timeline still valid? And are you still confident that you will be able to launch this game within the year?

The second question that I would like to ask you is about your existing game overall revenue momentum. So it does seem to be that for Lineage M, the overall momentum is still very strong, however, for Lineage W, and Lineage 2M, there continues to be double-digit declines within the top line that we are seeing. I do believe that during the first quarter call that you said that you did hope that there would be some stabilization, however, that does not seem to have been taking place. So in terms of the stabilization of performance, when do you actually believe you can see these titles stabilizing? And do you have any data that would actually back up your overall view in that manner?

[Taek-jin Kim, executive]

[Interpreted] So thank you for your question. It is right now the vacation season and the fact that you're not on vacation and participating in this call and asking us a lot of interesting question is something that we do appreciate. So maybe we can take your questions one by one. For the first question, I will address that. And for the second question, I believe Jason will be able to take that.

So maybe to address your question, what I can say that within the mobile game market, if you look at the current situation, as many analysts and investors are aware of, within the current marketplace, there have been a lot of Lineage like games that have been released. And as a result of that, it is true that within our existing IP revenues that there has been some impact from that situation.

However, as a leading company in the MMORPG area, of course, we do continue to strive to make efforts to strengthen our forte further and also ensure that on the top line side and in terms of gameplay, we can continue to show stronger performance and a rebound in our overall situation. However, at the same time, I think that another area in which the company is very interested in is to expand outside of the MMORPG space into new [ genres ].

So the first of such efforts would be the global puzzle game that we are planning to launch within the year PUZZUP. So if you look at the overall business model for this game, it's very different from the profile of models that we have had in the past. So the initial revenue in itself will not be something that will significantly contribute to the overall top line. But we do believe that over the mid- to longer term, that it would show us a stronger momentum, and that would be where we we'd be more focused on.

In addition to that, if you look at the characteristics of the game, it would not be contained to any specific region, but it would be a global game that we are looking at right now and having a global game very steady profile in terms of revenue is something that is very important. So in terms of the genre itself, it's something new for us. And added to that, we have tried to add on some NC only type of elements and uniqueness to the overall games. So PUZZUP and the launch -- global launch for this year is something that we are focused on.

So following that will be Battle Crush and also Blade & Soul S. For Battle Crush, this is a brawl-style battle action game, and for Blade & Soul S, this is, of course, a collectible RPG game that we have. So for these 2 titles, the overall timing that we are looking at right now would be the first half of next year. And right now, internally, we are making the preparations accordingly.

The reason why some -- the launch date has been adjusted towards next year is because of a couple of reasons. The first would be that we do want to be able to target the global market for these games. So as a result of that, for the existing IPs that we're basing these games off of, we do want to highlight and try to emphasize further the points of differentiation that these new titles will provide.

In addition to that, we want to ensure that we create a game that will satisfy the overall expectations of the global market and also be able to provide the best and most optimal type of experience for a wide variety of platforms. And as a result of that, right now, we're adding the finishing touches. And again, we'll launch within the first half of next year.

Towards the second half of next year, we also have Project G, which is, of course, a game that we have communicated to you before, and this is an MMOR -- MMO plus RTS type of genre, and this will also be a global launch.

And for AION 2, of course, this is a game that has a lot of internal and also external interest surrounding it in terms of the revenue contribution and also the overall performance of the game going forward. So as a result of that right now, we are trying to set a new standard in terms of the content that would be available under this game. And right now, internally, we are putting our full force under -- and against the development of the game in a whole. Unfortunately, I do think that it's a bit too early to talk about the pipeline of launch for this -- for AION 2. However, what I can say is that according to the internal targets that we have and time line, the overall progress is on schedule.

And for TL, as we have mentioned during the presentation, for the Korea launch, it is something that we are planning within the fourth quarter of this year will be led by Amazon Games. So for the user test, it is something that we are preparing to engage upon, and also, for the global -- global launch in itself and the communication surrounding those events. Again, Amazon Games will be taking the lead and sharing that information with you.

And for the domestic launch, the way -- the reason why we're looking at the fourth quarter would be that during the CBT that we have conducted, there were various issues that we were able to identify. And I think that we have been able to fully incorporate that and have completed the overall updates that are required. So based upon the feedback, we do feel comfortable about our domestic launch within the year.

And based upon the buzz that we can create from that domestic launch for the global market, we do want to create a more solid support base of fandom surrounding the game, and that is something that we do expect. So within this process, we are looking for an overall global launch that would take place simultaneously across the globe by Amazon Games next year.

[Jason Lee, executive]

[Interpreted] Yes. So maybe to go on to your second question, it is true that as you have said, for the Lineage W overall stabilization, it has not gone according to what we have expected. That is a situation that is taking place. And I do think that it is somewhat off of our initial expectations. And the reason for that is because if you look at the competitive environment, there has been a higher concentration of competitive games that have been released within the market. And as a result of that, we do think that, that has somewhat impacted the overall stabilization trend that we have been expecting.

So as of the current time, with regards to the focus that we have for our games rather than strengthening the monetization performance of the games of themselves, we do think that it is a time for us to be focusing on regaining the users back to the game, so that would be the focus of our efforts. And this is something, of course, that is ongoing. And we do think that the results of that is something that you will be able to see within the fourth quarter of this year.

[Operator]

[Foreign Language] The following question will be presented by Dong Hwan Oh from Samsung Securities.

[Donghwan Oh, analyst]

[Interpreted] If you look at the company's history across the past 2 decades, it seems to have been that with each new game launch that you have had, you have been able to contribute a new portion to your overall top line and that has accumulated resulting in the growth of the overall company. However, this pattern across the past year or so is something that I think has not actually been taking place. So as a result of that, for the new upcoming TL, do you think that it will be a game that will be able to fully offset the decline that you see in Lineage W's revenue? And if not, what game going forward do you actually believe will be able to have that offsetting effect going forward?

[Taek-jin Kim, executive]

[Interpreted] Yes, to address your question, I think it's a very good question. If you talk about TL and compare that versus the existing mobile games that we had launched in the past, I do think that it will be difficult to TL -- for TL to actually have, for example, a record-breaking top line after the launch. And as a result of that, the reason for that would be that in terms of the genre itself, it would be a different type of situation. So as a result of that, we do think that, that type of performance would be very difficult.

And in addition to that, it is a PC-based game, which also will be console supported through Amazon Games. But if you look at the overall business model, various aspects and characteristics of the game, we do think that it does provide a very different dynamic from the mobile games that we launched in the past. So as a result of that, we don't think that TL will have the effect of fully offsetting the decaying trend that we see in revenue alone.

So as a result, as mentioned, we do think that it will be difficult for a single IP to have that type of effect. However, and maybe regenerate the overall revenue performance that we have been able to seen from Lineage W in the past. However, that have been said, as we have mentioned, we do have a lineup of mobile games within the pipeline that will come one by one to the market. And added to that, Blade & Soul 2 is also going to be launched in Japan and Taiwan soon. So if you look at the indicators there, we actually do believe that there will be a strong contribution that we will be able to see from the top line from those launches.

In addition to that, as Eric had asked in the past and as we have also mentioned and you have said, internally, we do understand the concerns that you are voicing, and as a result of that, we are also thinking of various initiatives to try to not only offset the weakening performance, but also be able to show other ways that we will be able to grow once again. So this is something that at the department level, at the business unit levels and that the development team levels that we have engaged upon from last year. And I do think that there will be opportunities going forward through NCing or other types of events for us to be able to share that with you and also communicate further about what we're trying to do.

So if you look at AION 2 or the other games that we have within the pipeline, as our past history has shown with our existing games, when we have been in a challenging situation, we have been able to break through those type of situations and create a new track record for our performance and our future. So we do think, once again, in this competitive environment that we will be able to do that once again. And also, we do have various plans to try to regroup with regards to our overall top line and also in terms of profitability.

[Operator]

[Foreign Language] The following question will be presented by Jingu Kim from Kiwoom Securities.

[Jingu Kim, analyst]

[Interpreted] There are 2 questions that I would like to ask you. First is that with regards to TL, after the domestic test and the feedback that you have garnered, how have you actually made updates to the overall game in itself in terms of what type of -- how have you reflected the user feedback. And if you could share the details of those improvements that you have made, that would be appreciated.

And secondly, with regards to your games going forward, so for example, for Project M and Project E, how is the progress of development taking place for those games? And what would be the type of time line we can expect going forward?

[Taek-jin Kim, executive]

[Interpreted] So with regards to the feedback that we have received from TL, as you may be aware, I think that we can summarize it being that in terms of the positive points, there were around 3 main messages that we had received. One was that in terms of the overall entertainment factor related to the large-scale competitive content, that was something that a lot appreciated. Second was the overall depth of the open world that was being realized is something that also we got a lot of good feedback about. And the third was the direction of the overall business model.

On the flip side of that, if you look at areas in which people believed we could do a bit better, I think that one was related to the overall growth experience in the initial stage of the game; and the second was related to the combat system and the need to make some improvements in that area.

And as a result of that, I think that the improvements that we have incorporated accordingly can be divided into [ 2 big ] areas. One is that for the overall play in itself, we have made it more dynamic. So that more dynamic battle and combat is possible. So under that overall big title, what we have been able to do is ensure that the characters can move and also make general attacks at the same time. So that best can take place simultaneously. And also at the same time, we have tried to increase and better improve the overall response time that we have, so that overall play becomes more dynamic.

The second is in terms of the overall growth going forward in terms of how interesting it becomes or how entertaining it is. So we have eliminated a lot of the simple and repetitive type of content that is required for growth to take place, and at the same time, we have also accelerated the overall speed at which characters can be leveled up.

And from a big picture perspective, if you look at the target users that we are looking at for TL in terms of the overall regions, the age of the users themselves and profile, and in addition to that, the preference for a variety of genres and also the play experience that they have with the competitive and other competing MMORPGs, I think that we're looking at and trying to address a much broader base than before, and it's also a different base than our existing users that we see right now. So as a result of that, we have put a lot of thought into how to address these different aspects in the right way, and we are making various attempts and different types of approaches to try to satisfy that. So I think that this is a collaboration that continues with our partner, Amazon Games. And as a result, we have incorporated a lot of improvements and also the feedback accordingly.

[Jason Lee, executive]

[Interpreted] And for Project M, of course, this is a game in which we will be reflecting the overall technology that we showcased during [ GDL ] (sic) [ GDC ] in March. And as a result of that, the technology that we provided then was related to Project M. This will be a new console-based game, which will also be action-based drama. And as a result of that, this will be, again, a different attempt or a different type of game from what we have had in our past.

So for the new technology that we need to incorporate, we do think that, that will take a bit more time. So as a result of that, a slightly longer horizon may be necessary. However, that is not saying that it's in the very far out future. But I think that in terms of a time line that we would be able to share with you with confidence, this is something that we would have to have a bit more time for us to share with you officially. But the general timing of it would probably come sometime after AION 2.

[Operator]

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

[Jae-min Ahn, analyst]

[Interpreted] Thank you for the opportunity to ask questions. So I think that the question that I would like to ask is a follow-up to what Mr. Oh had mentioned before, and it is that if you look at the current game market and the overall performance that NCSOFT s showing specifically, I do think that it is different from in the past. So in the past, if a new game was launched accordingly, there was an overall contribution from revenue that we were able to see as a result of that, and there was a step-by-step growth in the overall profile, however, now it seems to be that, that is not how growth is taking place. And when a new game is launched, there is actually a cannibalization that is taking place, and as a result of that, I do think that it is a bit different.

So the question that I would like to ask is what's the top management view about this overall situation do you deem to -- do you deem to it to be a result of a very slow market across the board? Or in terms of the view that management has about various challenges that the company is facing, including I do believe that there are some issues with the labor union also. For this overall situation, what is management's view and opinion about how things are progressing?

The second question that I would like to ask is maybe a slightly minor type of question. But for TL, if you launch in Korea within this year, what would be the schedule for the rest of Asia in terms of the view going forward and your activities there? And in addition to that, in terms of your intangible assets, I do think that there has been an increase of about KRW 80 billion that we have seen within this quarter. What would be the reason behind that?

[Taek-jin Kim, executive]

[Interpreted] The question that you're asking right now is a very important question. And at the same time, we do also recognize that it is the key question that people are most interested in.

And I think that from a big picture perspective, the industry that [ we are ] presented it and that we're positioned in would be the entertainment industry. And if you look at the fundamental nature of this business, it is that you need to be able to very swiftly come out with new products or new launches and do that consistently on an ongoing basis. And if you're not able to do that and provide these 3 different elements, I do think that, that means that your competitive edge is something that may be a bit shaky.

So as a result of that, I think that at the company level, what we believe is that for -- to be able to make that happen for us to be able to implement the 3 elements that we have just mentioned, there are 3 things that are necessary. The first is that, of course, we need to be able to have the resources that would be available to sufficiently support this type of operations. And at the management level, we also need to have the capability to accurately allocate the resources according to the areas that they are needed. The second is that also you do also need to have a vast amount of experience and be able to accumulate experience within this area because this is not something that [ Novus ] can do. And the third would be that combining the 2 factors I mentioned before, I think that having the strategy to be able to play out and execute [ the according ] would be something that is very important.

So as a result of that, I think that what we're trying to do in terms of our new launches going forward is that different from the existing IPs that we have and also the genres that we have been engaged in, in the past, we're looking at a globalization profile going forward. We do want to be present in a wider variety of genres. And at the same time, I think that at the management level, we do understand that for the key core competencies that are required for execution of this type of vision that we have, that there are areas that we do feel that we are a bit lacking in.

So at the management level, we do recognize the issues that we are facing and the challenges that we are facing. So right now, we are trying to do an analysis about the root causes of this situation and try to execute the changes that are necessary accordingly. So right now, we are looking through at a full company level, the overall processes that we have in place, and we're also double-checking the structural aspects of our overall operations. So this is an ongoing process, as we speak right now. And as a result of that, we are in the process of formulating a new strategy for the future.

And as a result of those efforts, I think that officially, in terms of our plans for the future and also for the launch pipeline, what we want to be able to do is not repeatedly come up with changes or maybe delays within the schedule. So we want to be able to clearly communicate our intentions for the future and to be able to abide by what we have set forth. So this is something, as management that we are committed to making happen.

And for TL's launch outside of Korea and the Asian region, this is again, something that we are consulting and talking to with Amazon Games about because we do want to make it in line and at the same time, as a global launch. So as a result of that, I do think that in the not-too-far future, please understand that I can't share you specific dates that there will be an opportunity for Amazon games to come out with an official announcement.

And for the intangible assets, of course, being a numbers guy myself, of course, I looked at the numbers and said, "Oh, maybe a question would be coming out related to this point. And of course, it is a question that you have asked. So I think I can address it.

So I think that to that point, what I can say is that in addition to the overall pipeline that we have shared with you on this call today and also the new IPs that we have for the future, there are various other projects that are ongoing or various other initiatives that we have at the company level for future growth and also to further solidify our global competitiveness.

And as a result of that, we did make an investment into intangible assets to, again, strengthen our global competitiveness. As a result of that, this is not a one-off event, but we do think that there will be similar nature investments going forward. So there will be other intangible asset investments that we will be making to again ensure that we are able to secure the growth drivers for the mid- to long term.

So again, this is something that we have acquired for longer-term growth [ that ] we are looking at a wide variety of options available for us. So in terms of how we are going to utilize this investment into intangible assets and commercialize upon that, I think that this is something that we -- when we feel is the right time that we will share with you not only through the quarterly conference calls that we have, but also on an infrequent basis, as information becomes more available. So we will continue to communicate very fluently.

[Operator]

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

[Taek-jin Kim, executive]

[Interpreted] So if there are no further questions, again, I would like to thank everyone for participating in this peak vacation season. And once again, we do hope to come back in the future with more exciting and also interesting more positive news for you. So on that front, of course, we will do our best. Thank you very much.

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