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Edited Transcript of 251270.KS earnings conference call or presentation 12-Aug-19 7:00am GMT

Q2 2019 Netmarble Corp Earnings Call (English, Korean)

SEOUL Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Netmarble Corp earnings conference call or presentation Monday, August 12, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gi-Wook Do

Netmarble Corporation - CFO

* Young-Sig Kwon

Netmarble Corporation - Co-CEO

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Conference Call Participants

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* Dong-hee Kim

Meritz Securities Co., Ltd., Research Division - Analyst

* Namjun Lee

CIMB Research - Analyst

* Sang-Hyun Lee

IBK Securities Co. Ltd., Research Division - Analyst

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Presentation

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Operator [1]

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(foreign language) Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2019 second quarter earnings results by Netmarble. This conference will start with the presentation followed by a divisional Q&A session. (Operator Instructions) .

Now we shall commence the presentation on the fiscal year 2019 second quarter earnings results by Netmarble.

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Unidentified Company Representative, [2]

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[Interpreted] Good afternoon. This is [Niti Kim] from Netmarble's IR team. First of all, I thank the investors and analysts for taking time out of your very busy schedules to attend the Q2 earnings release session of Netmarble.

Today, we have here with us, CEO, Young-Sig Kwon; CBO, Young-hoon Paek; CGO, Seungwon Lee; CFO, Gi-Wook Do; and Head of Investment, ChanSeok Choi. They will be addressing your questions after the results presentation.

Please note that the results presented today have yet to undergo an independent auditor's review and therefore is subject to possible future changes.

With that, CFO, Gi-Wook Do, will deliver the results presentation.

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Gi-Wook Do, Netmarble Corporation - CFO [3]

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[Interpreted] Good afternoon. This is CFO, Gi-Wook Do.

I will give you the brief overview of Q2 results. Please refer to Page 3.

Revenue in the second quarter increased 5.1% Y-o-Y and 10.2% Q-o-Q with KRW 526.2 billion. EBITDA decreased 23.7% Y-o-Y and increased 3.3% Q-o-Q with KRW 62.3 billion. Operating profit decreased 46.6% Y-o-Y and 2.1% Q-o-Q at KRW 33.2 billion. New titles contributed to the rise in revenue over the previous quarter but with related marketing costs being reflected. EBITDA and operating profit remained similar to previous quarter's level.

Next page is our net profit. Net profit in the second quarter decreased 42.7% Y-o-Y and 10.2% Q-o-Q at KRW 38.0 billion. Controlling shareholders profit decreased 33.5% Y-o-Y and 2.3% Q-o-Q at KRW 38.5 billion. However, with the titles released in second quarter being reflected wholly in Q3 and with added thrust from the new titles released, the company expects to see a real turnaround. We expect our operating profit levels to quickly recover to the level of 2017 quarterly results in Q3 and Q4 2019.

Next page is on overseas revenue contribution. Revenue from overseas business recorded KRW 339.0 billion in Q2 and contributed 64% to overall revenue, which is a growth by 4 percentage point on the previous quarter. This was mainly thanks to the revenue increase in Japan with the launch of the Seven Deadly Sins. Geographic breakdown is as follows: Korea, 36%; North America, 31%; Japan, 13%; Europe, 8%; Southeast Asia, 7%; and others, 5%. The company expects overseas contribution to continuously rise to 70% level in the second half.

Next page is on game portfolio. In the second half, RPG made up 41% of the portfolio, followed by 24% Casual, 24% MMORPG, 11% of others, maintaining our diversified portfolio. Highest revenue-generating titles at the end of Q2 are Marvel Contest of Champions, Lineage 2 Revolution, Blade & Soul Revolution, Marvel Future Fight and Seven Deadly Sins, in that order. The company expects to see a more diversified major games portfolio in the second half.

Next page is on major cost structure. Operating expense in Q2 was at KRW 493.0 billion, which is a 12.4% increase Y-o-Y and 11.1% increase Q-o-Q. This was due to added headcount due to increase in line-up and also from the M&A for North America studios. Labor cost at KRW 119.5 billion saw an increase of 17.5% Y-o-Y and 4.9% Q-o-Q. KRW 83.6 billion was spent on marketing, which is an increase of 6.4% Y-o-Y and 33.1% Q-o-Q. This is, as I've mentioned, due to the early reflection of marketing costs associated with new game launches.

Now on the major events lined up for the third quarter this year. The company launched Koongya Catchmind and Yo-kai Watch in Q3 and has plans to introduce Blade & Soul Revolution in the Japanese market. We expect good results from the titles following the success of Lineage 2 Revolution and Seven Deadly Sins. The company has plans to globally launch King of Fighters All Star. In the fourth quarter, we plan to launch our core major titles, Seven Knights II and A3, and also plan the introduction of Tera Origin.

This concludes the results presentation. Now we will be entertaining question. Thank you.

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Questions and Answers

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Operator [1]

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(foreign language) Now Q&A session will begin. (Operator Instructions) (foreign language) The first question will be provided by Tony Kim from Meritz Securities.

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Dong-hee Kim, Meritz Securities Co., Ltd., Research Division - Analyst [2]

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[Interpreted] So I will give the translation of the 2 questions first. This is the first question. With your new title launches, could you please give us a guidance on your results for the upcoming quarters, that is the third quarter? And now on to the second question which is related to foreign currency exchange rate. Rates, they're up and down in the foreign currency exchange rate. What would be the implication to the company?

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Young-Sig Kwon, Netmarble Corporation - Co-CEO [3]

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[Interpreted] Yes. CFO Gi-Wook Do will provide the answer to the first question which is related to the third quarter guidance. As was mentioned during the results presentation, of course, I cannot give you the concrete numbers here. But the second half, we do expect to see much better results compared to the first half. So overall, the operating profit will see much improvement over the first half, and we believe that the operating numbers will be back to the levels that we enjoyed back in 2017 in the third quarter, and we do expect to see even better numbers in the fourth quarter.

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Gi-Wook Do, Netmarble Corporation - CFO [4]

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[Interpreted] Yes. Now I'll be entertaining the foreign exchange rate related question. This is once again, CFO Do. So if you look at our revenue and if you look at the flow of our funding, you will see much more of our asset denominated in foreign currency rather than our liabilities. So our dollar-denominated assets much outweighs our dollar-denominated liabilities. Therefore, the current trend in depreciation in won value actually adds to our results, and this is the overall impact of foreign currency exchange to our numbers. Of course, on the (inaudible) we manage our numbers. We manage our profit and losses according to the exchange rate change. But overall, the current trend is in our favor.

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Operator [5]

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(foreign language) The next question will be provided by Sang-Hyun Lee from IBK Investment and Securities.

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Sang-Hyun Lee, IBK Securities Co. Ltd., Research Division - Analyst [6]

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[Interpreted] Yes. Two questions. The first question is on your expected titles in third quarter and fourth quarter. I see a lot of new titles going abroad and being launched in the overseas market. Which title do you have the highest expectation? This is the first question. And now on to the second question which is related to treasury shares. I believe that the company has been engaged in purchasing treasury shares, and what will be your use for it? Would you be [retiring] it? And do you have any plans to further buy treasury shares from the market?

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Young-Sig Kwon, Netmarble Corporation - Co-CEO [7]

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[Interpreted] So this is CEO Kwon with the answer. So in the second half, we are going to take Blade & Soul Revolution to the Japanese market. And after that, we will be taking it to several markets. And we also have several plans for Seven Deadly Sins and King of Fighters All Star. And we do expect to see good results from all of them.

Yes. Now on to the second question which is related to the treasury shares. We have purchased treasury shares in order to stabilize our share prices and also to enhance shareholder value. We have no set usage for the treasury shares that we have purchased. But when an opportunity presents itself, we could present to use. And as of today, we have no further plans for additional purchase of treasury shares from the market.

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Operator [8]

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(foreign language) The next question will be provided by Namjun Lee from CIMB Securities.

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Namjun Lee, CIMB Research - Analyst [9]

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[Interpreted] Two question. First is on your possible next M&A, i.e., (inaudible) announcement. There are rumors out in the market that the M&A has been nullified. So I would like to hear more clarification from the company on next in M&A.

And now the second question is related to your Seven Knights II. When will be the release timing? And what's the game like? Or what's the level of sophistication associates with the Seven Knights II?

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Young-Sig Kwon, Netmarble Corporation - Co-CEO [10]

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[Interpreted] So at this point in time, please understand that we cannot further comment on the next in M&A case. And well, I would also add that we are always on the lookout for projects that will give us synergy both for our business and also for our finances.

Yes. And as for your second question which is related to launch date of Seven Knights II and also possibly A3: Still Alive, we still see some delay, so you must have questions concerning these 2 title. But we are more focused on having the game more well made rather than on the actual release date. So there were some delays, but at this given point in time, we do expect to see the 2 titles being launched within the year.

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Operator [11]

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(foreign language) Well, with that, we will conclude the earnings session for Netmarble 2019 second quarter. If you have any further questions, please don't hesitate to contact the IR team. Thank you.

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