NCSOFT Corp

KRX:036570

Earnings Call Transcript 2023-Q3

[Operator]

[Interpreted]

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 Third 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 Q3, 2023. Now, let me begin my presentation with the earnings highlights.

Q3 sales posted KRW 423.1 billion, representing a decrease of 4% Q-o-Q and 30% Y-o-Y, stemming from a decline in revenue from Lineage W and Lineage2M. Operating profit posted KRW 16.5 billion, down by 53% Q-o-Q and 89% Y-o-Y, driven by a sales decline and an increase in marketing and other expenses. Pretax income was KRW 46.2 billion, up by 18% Q-o-Q, mainly due to foreign exchange gains stemming from the stronger U.S. dollar, but down by 82% Y-o-Y. Net income was KRW 44 billion, a 44% increase Q-o-Q and 76% drop Y-o-Y.

Next, let me discuss the sales of each game. Lineage M recorded sales of KRW 119.6 billion, a 6% drop Q-o-Q. Lineage M has been continuing user-friendly services. And even though it has been 6 years since it was launched, its position as the top ranking title in Korea is being maintained. Going forward, we will advance our content and service operations so that we can continue and expand Lineage M's life cycle.

Lineage W sales recorded KRW 90.1 billion, a 12% drop Q-o-Q and Lineage 2M sales recorded KRW 54.9 billion, an 11% drop Q-o-Q. Lineage W and Lineage 2M was able to ease the sales decline compared to the previous quarter through content and events that activated user come back in a fiercely competitive mobile MMORPG environment. In Q4, we expect to end our sales decline trend and achieve more stable performance through our 2-year and 4-year anniversary update, respectively.

Blade & Soul 2 posted KRW 9.2 billion, up 116% Q-o-Q with the result of the launch in Japan and Taiwan being reflected. The sales of the 5 PC online games together was KRW 93.2 billion, a 6% increase Q-o-Q. Lineage, AION, Blade & Soul and Guild Wars 2 sales, all went up Q-o-Q. Lastly, royalty totaled KRW 35.3 billion, a 3% decline Q-o-Q. Lineage M Taiwan royalty went up for 2 consecutive quarters, but Guild Wars 2 China royalty dropped.

Next, let me discuss expenses. Q3 operating expenses posted KRW 406.6 billion, similar to the previous quarter and down by 12% Y-o-Y. To break it down by line items, labor cost was KRW 198.3 billion, a 5% drop Q-o-Q with the reduction in welfare expenses and others. It was a 5% increase Y-o-Y. Marketing posted KRW 27.7 billion, which is an increase of 126% Q-o-Q due to factors, including Blade & Soul 2 regional expansion and Guild Wars 2 expansion pack launching. However, with efforts made for more efficient marketing, the spend went down 29% Y-o-Y.

Depreciation posted KRW 29.3 billion, a 5% increase Q-o-Q. With data center facility expansion, depreciation, including for servers increased. Variable costs and other expenses combined was KRW 151.4 billion, which is a 3% drop Q-o-Q. With the data center facility replacement, other consumables expenses increased, but distribution fees declined as mobile sales decreased. Our next major title, MMORPG Throne and Liberty will be officially launched on December 7 in Korea. The pre-registration, which started on November 2 is being smoothly implemented with numbers and speed, which is going beyond internal expectations. And at the upcoming G-Star, developers will be directly playing TL's core content, including a large-scale Guild Raid.

After the domestic CBT in May, we reflected the feedback from many customers and there were many changes, including improving the battle and growth system and growing content volume. We express our gratitude to everyone who has given us affectionate advice and recommendations. And we will do our best to perfect TL so that it can successfully be launched on December 7. On the other hand, many new titles that will be launched after TL are smoothly being developed. In case of 3 gains, collectible RPG BSS and action brawler BATTLE CRUSH and open wall shooting LLL, we have a venue for customers to directly play at this year's G-Star. We will take this year's G-Star as an opportunity to communicate with our customers and closely listen to the voices of our users and actively reflect this in our future development process.

In order to successfully execute our future growth strategy to target the global market and to diversify our portfolio, we are going to continuously increase touch points with our users. And going forward, we will be asking for your warm interest and support for our company.

This wraps up my presentation on Q3, 2023. Thank you very much.

[Operator]

[Interpreted]

Now, Q&A session will begin. [Operator Instructions] The first question will be provided by Jingu Kim from Kiwoom Securities.

[Jingu Kim, analyst]

[Interpreted]

I am Jingu from Kiwoom Securities and I have one question. Well, going forward, I think you mentioned that you were interested in the blockchain business, but I think you went back on that, and you mentioned that you do not have interest. However, I believe that we are seeing the blockchain business flower once again. And it seems that we are seeing the market actually showing many signs of visible recovery. However, I'm curious about your stance. Are you still not interested in the blockchain business? And do you still -- and regarding the strategy, -- is it true that you still have no strategy for the blockchain business because you're not interested?

And I have another question actually related to your assets and cash because I know that you do hold a great amount of your cash-related assets. And it seems that you haven't shown any visible investments so far. So, can you tell us about why you haven't made any total investments until now? And can you tell us about any future plans for investment going forward?

[Taek-jin Kim, executive]

[Interpreted]

Thank you very much for your question, Mr. Kim. And I would like to answer both of your questions. And to answer your question, well, I believe that we haven't made any official announcement that we are going to suspend our blockchain business. So, I don't recollect that being made in my memory. And secondly, I also believe that you mentioned that it seems that blockchain game business is now being revived. But I don't really get what kind of background you're referring to in making that comment. So, maybe I can just explain based on my own understanding and our stance in this business going forward.

Well, I think I have mentioned this many times. And I believe that in Korea, a lot of people have the misunderstanding that the blockchain games actually are identical to P2E, Play-to-Earn. And I believe that there are many game companies that actually believe that this is identical and have strategies to carry out in this manner. However, we believe that blockchain games are not identical to P2E in our case at all. And we believe that the form of this type of game should be actually converged in a different fashion.

So, we have the blockchain games and we believe that going forward, we should think about how the blockchain games could be converged and what timing it should be converged to. Because I believe that we should have the understanding or we should have the assumption that we need to have economic balance within the game and it needs to be stabilized. So that should be something that should actually be a condition in a blockchain game going forward in this case. However, I believe that regarding these 2, which is in-game balance and the balance in the blockchain game, though we need to have both of them for the game to be well implemented and for the economic system in the game to be well run.

However, I believe at this time, we don't have the external conditions that are met at this point. And regarding the internal conditions as well, well, I believe that it is still not time yet because if we have this coming in, well, it can lead to breaking down of the existing balance. And it can be irresponsible because we have to think about the existing users in the game and we also need to think about the participants that will come into the game afterwards. So that is why, at this time, we are thinking long and hard about what our stance should be going forward. And we've never said that we are not going to actually be delving into the area of blockchain games. And so, I believe that regarding the revival of the blockchain games that you mentioned, well, I believe that our company has a different perspective.

So, let me add a few more words to actually end my answer. I believe that for the convergence of a blockchain game, well, we need to have the stability of the [ L1 currency ] that is linked, and it also needs to be universal. Then I believe that we can talk about the balance in the game with in-game balance and external stability. However, I believe that this is not yet time and we haven't reached that point yet.

Well, let me answer your question about M&A. Well, it is true that we have been pushing for M&As continuously. And regarding the direction of our future M&As, we have been continuously reviewing possibilities in both game and non-game M&As. However, regarding -- having some small-sized M&As going forward, it could help a few companies and it could lead to their breakthrough but we have been emphasizing from a long time ago that we believe that in our case, we need to have sizable, significant M&As for it to be meaningful to our strategy. So that is the direction of how we're reviewing our M&A possibilities.

Well, we are currently reviewing some M&A as we speak, but I would like to tell you about a very strong principle that we adhere to at our company. It is true that we have seen in many M&A attempts in companies -- in game companies in and out of Korea that after the M&A, what happens is that the value of the company that was acquired actually doesn't really go up after the acquisition. And what happens is that because of the financing or other issues of the company that was acquired, this actually becomes a burden on the company's HQ that actually made the acquisition.

So that is why I want to tell you that we are very prudent in our approach for M&As. And my philosophy actually tiers to the policy that, having various M&As doesn't always lead to good results. We believe that even if there is a single M&A, well, it should be a great help to the company. So, I believe that's why we really need to be prudent. And that is why we have been very prudent and vigilant in our reviews of possible M&As going forward. And I can tell you that we have been making many efforts and we truly hope that we can have very positive results going forward. And according to the characteristics of M&A discussions, I cannot really give you more details at this time, but it is true that we have had many conversations regarding M&A. However, we haven't had a very feasible result yet going forward. So I can just tell you at this time that we have been very consistently making efforts for M&As going forward. And I truly hope that we can soon tell the market of some very positive results regarding M&As going forward.

[Operator]

[Interpreted]

The following question will be presented by Kim Junhyun from HSBC.

[Junhyun Kim, analyst]

[Interpreted]

I am Kim Junhyun from HSBC, and I have 2 questions. First is related to your plans for the launch dates because I know that you have mentioned that you have a changed management committee. And one of your goals is not to have delays of future launches. And you also mentioned that at G-STAR, you're going to showcase some of your titles as well. So can you tell us, is there any possibility that there will be some delays of your launches for new titles next year or going forward?

And my next question is about the nongame M&A possibilities that you have mentioned in your answer. So I'm curious about the nature of the nongame M&As that you have been reviewing? Do you mean that you're going to expand into other business areas or are the nongame M&As referring to businesses that are not game developers, but businesses that can help you support game development?

[Taek-jin Kim, executive]

[Interpreted]

Well, thank you very much, Mr. Junhyun Kim. I know that you have been showing consistent interest in our company. So I'm truly grateful for your interest. And let me answer your question. It is true that we have set up the business change management committee, because it is true that we had some aspects that were not truly satisfying the market from the past. So that is why we have set up this committee, so that we can have our utmost priority regarding our launch and development schedule, so that it could be looked at from a new perspective. So we can have true discipline, so that we will not be delaying any of the scheduled date going forward.

So what you asked in your question was correct. And I can state that regarding our launch schedules going forward, well, as we had communicated, there will not be delays going forward. And actually we have very smooth sailing in our implementation state.

So regarding TL as well, as we had communicated to the market, we do not foresee any changes in our schedule. And for the overseas market, as was mentioned, we will be launching together with Amazon next year. And for BATTLE CRUSH, BSS and some new IPs, it will also be going as scheduled.

So regarding the M&A question, well, as was mentioned in the question by Mr. Kim, Kiwoom Securities and also Mr. Kim in the previous question, Mr. Kim Junhyun. I agree with what you just mentioned because I do believe that it is time for us to have an M&A going forward because I believe that although we have plans to launch many new titles, but still M&As are a very good method for us to boost our [ competence ].

So you also asked about -- a question about the nature of our M&As going forward, regarding whether there will be non-games or game-related, but I can tell you that although I mentioned non-game possibilities, our focus lies in games. So it will include development studios related to game development, and it will be mostly relevant to companies that actually can help us expand our IP.

However, it is also true that we have seen several opportunities for us to have attractive opportunity for M&As for nongame companies as well. However, regarding whether they are game or nongame-related companies, I have 3 main principles; first, is never to undermine the EPS accretion. And in many cases, I think that when people engage in M&A, they have a very hopeful view. However, I will never concede to the EPS accretion being undermined. So that is the first principle.

And the second principle is about growth potential. Whether it's a game company or a nongame company, I believe that the M&A will have to have the potential to grow going forward. So even if the price is very low, I believe that if it doesn't have growth potential, then it will not be a criteria for us.

And thirdly, we will need to have the M&A that can help us expand our user base, in particular, in different geographies. So I believe that these 3 criteria or conditions need to be met for us to have a successful M&A going forward.

And as you probably are well aware, until we sign the [ SBA ], well, for M&A, we really do not know what will happen. So we will need to be very prudent. And as you have mentioned, Mr. Junhyun Kim, well, thank you very much for your question, and we will be very seriously reviewing these possibilities with prudence.

[Operator]

[Interpreted]

The following question will be presented by Dohyoung Kim from CLSA.

[Do-hyoung Kim, analyst]

[Interpreted]

Thank you very much for the opportunity. I apologize that I have multiple questions beforehand, and I am Kim Dohyoung from CLSA. My first question is about the Amazon Global Technical test that you had with Amazon, and I know that it was not disclosed to the public. So I'm very curious about the western users' feedback after you implemented the feedback from the first test. So can you tell us about what the response was?

And second question, to my knowledge, I know that you are going to launch first domestically and then launch overseas. So after you launch in Korea, are you going to have a global disclosed test open to the public? And when do you think you will launch after -- a launch globally after you launch in Korea? So do you have any idea of the term that will exist in between?

My third question is about your marketing guidance and operating profit margin for 2024, because I know that your mobile sales has gone down, leading to a bit of a weaker fundamentals on your side. So because I know that you're going to engage in more launches next year and have more marketing expenses probably, I would like to know about your market guidance and operating profit margin for 2024.

And my fourth and last question is about your LLM development. I know that you have been proactive in your response and you have been mentioning that internalization and commercialization will lead to your company contribution. So can you give us some guidance for that?

[Taek-jin Kim, executive]

[Interpreted]

Well, thank you very much Mr. Kim Dohyoung of CLSA for your very opportune questions. And it's a bit of a coincidence that we're getting questions from 3 people that are all with the same Kim, last name, Kim Jingu from Kiwoom Securities; Kim Junhyun from HSBC, and yourself as well. So even if you're not Kim, you can always freely ask questions.

So to seriously answer your question, yes, it is true that we have had feedback from our global undisclosed test. And I cannot give you a lot of the details, but there are some things that I can inform you of, like we had in the case of -- domestically, it is true that we had very good responses because we had improvements in our combat content and our progression content, and we had removal of automatic hunting or other functions that were very warmly responded to.

And actually, we had a showcase last week, and we had very positive user responses for combat progression, forging and customization and others. So we believe that these are very positive signs.

And as you had mentioned, Mr. Kim Dohyoung, in the Western area or Western World, we are actually working with Amazon for additional or going forward.

So regarding the timing of our release going forward, well, according to our contract, it states that Amazon will be the entity that will communicate with global users. So I will be asking for your very kind understanding, because according to the conditions of our contract with Amazon, they will be the ones that will directly communicate with users.

Well, regarding your second question regarding the decline of our mobile sales and the schedule for new title releases, maybe we can have Jason that can answer the questions for us going forward.

[Jason Lee, executive]

[Interpreted]

Well, regarding your comments about the Lineage M for Q3, it is true that on a Q-o-Q basis, it went down 6%. But I believe that there is no need for concern here because that was just a temporary sales decline. And although it has been a little bit shy of half passing of Q4, even though we have had some fluctuations in the quarter for Lineage M, I think that regarding our fundamentals and our sales stance, they are quite firm. So there's no need for concern.

And I think actually, you -- probably all of you are more interested in when is the Lineage W sales decline going to stabilize. And I think that we can show you very solid results from probably Q4. Although we had some misses until now. But in the last quarter, I think it was mentioned that there could be some further decline in Q3. However, we believe that from Q4, we are going to enter into the stabilization phase. So going forward, we believe that for Q4, for Lineage M and Lineage W, regarding our base fundamentals for our results, this is going to mean the beginning of our stabilization phase entering into 2024. Although there could be some changes going forward, but that is our judgment at this point in time.

[Taek-jin Kim, executive]

[Interpreted]

And regarding your question about marketing expense guidance, well, unfortunately, we are not as fortunate as the U.S. because they can give you very explicit guidance without a lot of limitations, but although that is not the case in Korea, I will do my best within the limited conditions of the domestic environment.

Well, also to give you some insight on the current status, it would have been truly great or positive if we could have given you very exciting news about our sales. But we truly feel that -- we truly feel sorry to our shareholders that we haven't been able to convey that type of news to you. But we can say for sure that from last year, we have acknowledged the situation, and we have been doing our best to control our marketing expenses and to have company-wide control, and we have had very good results. And we believe for next year as well, we are going to have good results in controlling our expenses and costs.

But regarding marketing, because we're going to launch a new title in 2024 and also launched TL at the end of this year, we are going to have some marketing expenses. So it will not be as easy as this year to have a very tight rein on our marketing expenses. So you can, I guess, logically assume that it might go up a bit. However, as we had mentioned, we have set up the change management committee, so that we can have great efficiency in our marketing expenses going forward. So I can promise you that we are going to do our best for our existing and new titles as well.

And there is one comment that I would truly like to communicate with our shareholders and investors, which is to say that our marketing expenses will not be as greatly increased as we had in the past, when we had launched big title MMORPG titles. So I'm sure that if you follow our company, if you see our numbers, you probably will get an idea of what I have been mentioning about. And regarding our operating profit margin, we will do our best, so that it can actually be at a similar level or even have a slight improvement. But since I am a numbers person, I cannot be very aggressive on giving you a commitment. So I can just promise you, that we will do our best to actually safeguard our operating margin. And our IR team will also be very open with our operating margin guidance and our efficiency plans going forward. So you will hear more from them. I believe that if you have further questions.

To answer your last question about internalization and the commercialization plan for LLM, Well, I believe that this is an issue not just limited to our company, and it is actually relevant to the entire game industry as a whole. So we have been deliberating intensely within our company. But I think at G-Star, there will be opportunities for us to actually show you in person regarding some answers to your question, through game events or having sessions that will give some more information about AI. So maybe you can hear more from us at that time.

[Operator]

[Interpreted]

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

[Jason Lee, executive]

[Interpreted]

Thank you very much. We will conclude NCSOFT earnings call at this time. And regarding our results and earnings for the bottom line and top line as well, we know very well that showing the best numbers to the market will be very important, and we will be making company-wide efforts for us to have better results. And we will do our best, so that we can achieve those results in the shortest amount of time possible. Thank you very much.

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