NCSOFT Corp

KRX:036570

Earnings Call Transcript 2023-Q4

[Operator]

[Interpreted] Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2023 fourth quarter earning 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 the NCSOFT earnings conference call for the fourth quarter of 2023. Let me begin with financial highlights.

Full year 2023 sales recorded KRW 1,779.8 billion, marking a 31% Y-o-Y decrease, stemming from a decline in mobile game sales. Operating profit posted KRW 137.3 billion, down by 75% Y-o-Y due to the decline in sales. Pre-tax income was KRW 206.2 billion and net income KRW 213.9 billion, dropping by 66% and 51% Y-o-Y, respectively.

Q4 sales rose 3% Q-o-Q, driven by higher mobile game sales [ and saw ] a 20% Y-o-Y decline totaling KRW 437.7 billion. Q4 operating profit was KRW 3.9 billion, down by 77% Q-o-Q, attributed to an increase in marketing and other expenses and down by 92% Y-o-Y due to the decline in sales. Q4 pre-tax loss was KRW 20.4 billion, marking a Q-o-Q transition to deficit and Q4 net income dropped to KRW 25.2 billion, reflecting a 43% decrease Q-o-Q.

Next, let me discuss sales by platform. NCSOFT has expanded its list of live service games with the launch of TL and is developing new titles across various genres, aligning with our strategic objective of global market expansion. We anticipate this will further diversify our live service game lineup. In light of such changes in our business structure, we have opted to present sales by platform rather than by game starting this quarter.

Q4 mobile games saw sales of KRW 298.9 billion, up 9% Q-o-Q. Lineage M remained robust in Q4 and Lineage 2M and Lineage W experienced higher sales Q-o-Q, driven by their respective full year and 2-year anniversary update. In the full year, mobile games posted sales of KRW 1,200.4 billion, a 38% decline from the previous year's record high performance.

Q4 PC game sales posted KRW 92.3 billion, down by 1% Q-o-Q. The figure tends to fluctuate based on game update schedules. Lineage, AION and Blade & Soul experienced a Q-o-Q decline, which was offset by the increased sales from Lineage II and Guild Wars 2 as well as TL, the newest title launched on December 7. Yearly PC game sales rose KRW 365.1 billion, dropping by 6% Y-o-Y.

Q4 royalty declined by 13% to KRW 30.6 billion, primarily due to a decrease in royalties from Lineage M Taiwan and Guild Wars 2 to China. Yearly royalty recorded KRW 144.5 billion, down by 8% Y-o-Y.

Next is the sales overview by region. Q4 sales in Korea and Asia rose 3% and 8% Q-o-Q, respectively, driven by the mobile game sales force. As for North America and Europe, the sales improvement of Guild Wars 2 lifted the regional performance by 15% Q-o-Q. Combined overseas sales and royalty in the full year and Q4 accounted for 35% of the total yearly sales.

Now let me discuss operating costs. Yearly operating cost totaled KRW 1,642.5 billion, down by 18% Y-o-Y with early labor and marketing expenses falling 3% and 55%, respectively, supported by company-wide cost optimization efforts. Q4 operating cost was KRW 433.9 billion, 13% lower Y-o-Y.

Q4 labor cost was KRW 204.2 billion, down 12% Y-o-Y and up 3% Q-o-Q due to higher welfare expenses and severance pay. Q4 marketing expenses posted KRW 40.3 billion, down 16% Y-o-Y, but up 46% Q-o-Q, largely driven by marketing activities for the TL launch and participation in an offline gaming expo.

Q4 depreciation rose by 3% Y-o-Y and declined by 8% Q-o-Q, totaling KRW 26.8 billion. Variable costs and other expenses totaled KRW 162.5 billion, down 16% Y-o-Y, but up 7% Q-on-Q, attributed to factors including increased server usage fees and outsourcing development costs.

3 months have passed since the launch of Throne and Liberty or TL on December 7 last year and just last week, we successfully held its first [ speech work honoring ] significant attention from a lot of players. Since its launch, TL has been dedicated to listening to player feedback, fostering communication and enhancing the gaming experience while intensifying efforts for a global launch with the goal of achieving greater success in the global market.

NCSOFT is continually striving to implement changes. And this year, we are even more committed to taking bold steps to create opportunities for the great leap forward with every individual within the company working as one team. We'll ensure to leverage our collective capabilities to expand the user base of our live service IPs and enhance global competitiveness of our new IPs. Our efforts for cost optimization will continue through maximizing management efficiency and establishing a market and data-driven decision-making process. Furthermore, we'll dedicate our best efforts to creating new IPs and drivers for our future growth.

We greatly appreciate your ongoing support and interest in a number of future endeavors as we strive for new endeavors changes. This concludes our presentation on the full year and fourth quarter performance of 2023. Thank you.

[Operator]

[Interpreted] [Operator Instructions] The first question will be presented by Eric Cha from Goldman Sachs.

[Minuh Cha, analyst]

[Interpreted] I have 2 questions. The first question is about the traffic of TL. It seems that considering that TL is a new title release in a while from NCSOFT, despite this fact, traffic is underperforming. So I'd like to know if there's -- I'd like to know the company's general take on the biggest reason why this is happening. And I'd like to know whether this will have implications on the timing and operation of TL's global launch in the Western world.

My second question is about there is a growing interest in shareholder return policies and capital allocation. And regarding this, NCSOFT tends to have a higher capital or higher cash position. So I'd like to know the company's future capital allocation strategy regarding this.

[Jason Lee, executive]

[Interpreted] So thank you, Eric, for your question. I always appreciate your interest and help that you provide for us. And I'd first like to make an apology for not meeting your expectations regarding our earnings. So -- and we are aware that after TL's launch in Korea, the -- its performance indicators are not exceeding our expectations.

There might be multiple reasons behind this. But first, it has to do with the difficulty of content. And second, it also has to do with a user convenience surrounding the controllability of the game. And third, it also has to do with the balance issue following the introduction of PvE content. So due to these reasons, there was an underperforming retention indicator in the initial phase of the launch.

And what I'd like to mention about our TL team's efforts is that the TL team has been reflecting the request and demand of the users actively and therefore that has been translated into an improvement in content, and they're also continuously working on optimization efforts. And thanks to these efforts, we've seen a significant improvement in retention indicators.

And this is not just to rationalize our efforts regarding TL, but we do believe it's very important to generate new earnings and indicators in the global market for TL. And although this was a service that was launched in Korea, we have recognized that there is a lot of growing interest from global users surrounding this game, and we were able to identify that there is some height building in the western market surrounding this game.

So there will be no change in our plans to release this game this year. And since Amazon is our global publisher, as part of their marketing strategy, it will decide on the right timing of the launch considering the various competitive landscape in the global gaming market.

So in the global market, Amazon is already posting messages about coming soon news regarding TL, and it's currently preparing for a large-scale user test. And going forward, Amazon will be directly communicating with global users regarding the schedule of TL.

And regarding your second question, Eric, on shareholder return and capital allocation and cash, as we mentioned in our earlier -- previous earnings call, the company's major focus is on successfully growing our company organically and inorganically. And the company has an equal amount of emphasis on both approaches.

And as of yesterday, I saw that we have a cash balance of KRW 1,900 billion, but not only cash but also we have a lot of noncore assets like property assets and other various liquid assets. And as mentioned during our previous earnings call, we are going to focus on achieving an inorganic growth for the company in a direction that is a credit to our EPS. So as long as it is a credit to our EPS, we will look for opportunities in M&A deals and not just M&A deals regarding corporate entities, but also we are looking for opportunities to acquire IP. So we are making various reviews on various levels. And currently, the -- as mentioned before, the cash and other liquid assets will be used in pursuing that inorganic growth.

So the most important strategy will be to grow our top line back up. And so we are not only going to focus on maximizing the scales with our existing titles in the pipeline in 2024, 2025 and even times after that, but also we are going to actively look for opportunities to leverage our legacy IPs to the max through spin-off sales and so on. So to summarize, our basic goal is to stage a rebound for our top line. And by -- in order to do so, we will not only focus on our existing efforts for organic growth, but also we'll have a new focus on inorganic growth, which is an area that we've been quiet in compared to other competitors. So this is our basic approach.

[Operator]

[Interpreted] The following question will be presented by Jin-Gu Kim from Kiwoom Securities.

[Jingu Kim, analyst]

[Interpreted] I have 2 questions. First is, you mentioned about the change in the business model. And second, you also mentioned about investment strategy. So could you elaborate more on the specific directionality of strategies? And also, it would be great if you could provide a rough timeline on LLL. And also, it would be great if you could provide a progress update on the development of Project M and Project E.

[Jason Lee, executive]

[Interpreted] So first off, I'd like to mention that I saw your report that you recently wrote. Whenever our analysts write reports about our company, I never forget to read them. And I was aligned with the details of the report, the directionality and the suggestions that you provided in that report. So I'd like to thank you once again for your interest in our company.

So I'd like to first talk about the directionality of our investment strategy. So as mentioned during our previous earnings call, we are looking forward to not only leverage opportunities regarding our existing IPs but also acquiring new IPs as part of our game and nongame approach.

[ Understand ]. Another most priority that we will pursue is the geographic expansion. So of course, the Korean market is important, but it's also the global market, including the Western market and Southeast Asia is very important. And I believe that our company is underrepresented in those regions. And in order to make a breakthrough in those regions, we will continue to put in our efforts based on the principle that I mentioned earlier.

And regarding M&As, I ask for your understanding for not being able to provide all the specific details, but we are putting a lot of time and effort into this endeavor. And I hope we will be able to show tangible results within this year regarding the directionality of our investment strategy.

And regarding your question on platform [ and PM ], currently a lot of our sales come from mobile. However, as you know well, in order to advance into the global market, console is key. This is not just our -- an issue for our company, but it's just a global trend. So our efforts will be focused on diversifying into the console platform. And regarding pipeline for PC games, we also put the same amount of emphasis on the global PC game market.

So as we mentioned through multiple occasions regarding the monetization model, in order to target the global market, having a change in our monetization model is necessary. And therefore, we're currently -- we're currently trying to make changes that cater to each game.

But what's different from our previous approach is that different from when we focused all our efforts in leveraging our existing IPs, we will focus on acquiring new IPs and acquiring licensing rights in order to target the global markets.

And most importantly, I'd like to share a few remarks about LLL and AION 2. So AION 2 is a very important IP for our company. As you know very well, AION 2 inherits the legacy of the megahit IP AION. And we are putting in company-wide efforts for the development of AION 2.

So there's no need to say that we have to focus on reinforcing our existing forte in the area of MMORPG so there's no need to question that AION 2 is a very important IP in the MMO market. And to provide my thoughts on AION 2 a little bit further. The current global gaming trend is focused on PvE content. And we are also going to put an emphasis on PvE content through AION 2. So there will be a lot of massive amount of PvE content in AION 2.

Of course, it will have PvP content because PvP is just a given factor in MMORPGs. But on top of that, we will have a further additional emphasis on PvE content. So sorry if I can't provide you specific numbers at the moment, but there will be a massive amount of PvE content offered through AION 2.

Also LLL is an important IP as it's a new genre that we are advancing into and we're currently putting in a lot of company-wide efforts in developing this game. So timeline-wise, in 2024, we are planning on having an external test for LLL, and the development team of LLL will be directly communicating through [ Mzing ] other communication channels.

And regarding your question on Project M, as you've seen on the news, all projects have to go under some changes during its development process, and we're currently reviewing the game scenario and we're reviewing opportunities to make the organization for -- Project M more efficient.

So regarding Project E, I'll ask our IR division to communicate with you on a separate occasion regarding this topic.

[Operator]

[Interpreted] The following question will be presented by [ Chung Demon from Barrington Asset Management ].

[Unknown Analyst]

[Interpreted] So this is not a question, but I'd like to share my personal remarks. You said that the company is putting in company-wide efforts. However, when you look at the IR releases and public disclosures, it seems that the company is going backwards. In a situation where the companies are trying to improve their governance by valuing up their companies, I think NCSOFT is going backwards of this trend, which is pretty concerning. I have 3 points to -- I'd like to point out. First is the fact that the sales are not presented by game is concerning. It seems like this approach is not directly tackling the issue of underperformance. And secondly, this year, the CEO of NCSOFT received salary and incentives worth KRW 12.3 billion. And also from the year before, he also received an amount more than KRW 10 billion. So the company says that this is based on internal calculations. But when you look at other public companies, there are no public companies that receive more than KRW 10 billion in salaries and incentives. Also the management members who are the controlling shareholders of NCSOFT are receiving dividends rather than salaries and incentives. And I believe this has an impact on the cash flow of the company as well.

And also, you said that you have cash more than KRW 1 trillion and I wonder if this will translate into efforts to improve ROE. And NCSOFT is a heavy organization. It has more than 5,000 employees, of which 1,500 people are in management or business management, which is not usual for a company in this business. But rather than reducing the workforce, the company has announced to invest KRW 580 billion in constructing its new headquarters RDI Center. So I think in this situation, it's more immediate for the company to release sales that are presented by game rather than making these disclosures. So these are the 3 points that I'd like to mention, and there's no need to immediately address them right now, but it would be appreciative if you could know that the shareholders are concerned about these issues.

[Jason Lee, executive]

[Interpreted] So thank you for a meaningful question from Barrington Asset Management. As a person who've worked on the buy side and a hedge fund investing in Korean companies, I understand your concerns. And regarding this topic, we have been having internal discussions within the company. And there are remarks that I could make [ at this occasion ], but there are also remarks we can make during the Annual Shareholders' Meeting.

So regarding our change in presenting our sales data, I'd like to present a fact. And it's that among the global companies in the world, there are no companies that announce their sales data in our previous method. So if you know a company that does so, please let me know. But we're just trying to follow this general practice. And we had no intention of hiding our sales data per IP or per game and I think this is a misunderstanding. But whenever we have an underperformance in our earnings, I truly understand that this can cause misunderstanding. But I'd like to say that was not our intention, and we will continuously communicate through IR team.

And regarding your point about the top management salaries and incentives, the salaries and incentives of these management are determined by the Compensation Committee and the Board of Directors. All of the decisions are made there. So it's not in the authority of the finance team or the company to be involved in. But I still understand your concerns, but I cannot speak for the Compensation Committee at the moment because that would be overstepping their authority. So I think there will be better occasions where the compensation committee could address these concerns during the Annual Shareholders' Meeting.

And last but not least, you mentioned about the lack of discipline in our management. And you also mentioned about the relatively large size of the support organization at our company. But regarding this, we are aware and we are going to come up with execution measures to address this issue. And regarding your remarks on RDI supply center, we are looking forward to leverage various investment resources. And our important principle that we'd like to uphold is to turn nonperforming assets into returning performing assets. And this was mentioned during the Board meeting yesterday, and the Board members also were aligned on this approach. So I just want to mention that the management is clearly aware of this issue, and we are going to come up with a tangible result, and it's not going to take so long. But we will make sure to communicate our tangible results, and I would ask for your understanding.

And just a quick remark about the timeline for new titles. Rather than announcing the timeline of these new titles through earnings call, I think it'd be better to receive information through Mzing, which is a channel where the individual IP or game development teams communicate with users directly, which was in place since last year. So we will be going to communicate news on AION 2, LLL and other spin-off titles. So we are turning into a basic approach of being more open in our communication. So since you mentioned this again, we will make sure to communicate more transparently and directly going forward.

[Operator]

[Interpreted] The following question will be presented by [ Tunjun Kim ] from CLSA.

[Unknown Analyst]

[Interpreted] I had a lot of questions in store, but I will use next opportunity to ask the remaining questions, but I'd like to mention just 1 question. It seems that the efforts to control costs and optimize the company in 2023 has paid off. And as a result, it seems like the OpEx is somewhere around KRW 400 billion. So there seems to be some stabilization on that front. However, when you consider the marketing costs and other variable costs regarding TL in the fourth quarter of this year, the quarter's profit is expected to be somewhere around KRW 20 billion. So what is your forecast on the operating profit for 2021? And is there a possibility to improve this operating profit margin through additional cost efficiency measures?

[Jason Lee, executive]

[Interpreted] So thank you for your question. Since we don't have much time, yes, I'll be quick with this answer. It is true that we made large cost-cutting efforts this year. And since we're just starting these efforts, we're also going to see additional cost reductions this year. And we will continue to communicate about the results of these efforts.

And regarding the guidance for 2024, the performance of the new titles will be reflected starting in the second half of this year, but -- and that will include regional expansion efforts, including TL, our IP spin-off game efforts and just the general efforts to strengthen our IP sales fundamentals. So all of these results will be focused and concentrated in the second half of this year. So in the first half of the year, we'll be preparing to priming the pump for these results. So since we just started to promote efficiency, we will begin to see more tangible results. Of course, some will turn out into immediate number changes. But due to the tail effect, it will take some time to actually have these numbers materialized.

So in the later part of the first half of this year, BATTLE CRUSH is going to be launched. And somewhere around that period, BSS will also be launched and the sales will materialize in the second half of this year. So regarding the details, I will make sure to communicate this -- them with you.

[Operator]

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

[Jason Lee, executive]

[Interpreted] So since we don't have any additional questions, I will conclude our conference call for the fourth quarter of 2023. We will make sure to reflect the concerns that you've shown into our efforts. Thank you.

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