U.S. Markets close in 17 mins

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

Q3 2019 Netmarble Corp Earnings Call (English, Korean)

SEOUL Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Netmarble Corp earnings conference call or presentation Tuesday, November 12, 2019 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Chang-Hwan Seol

Netmarble Corporation - Chief Strategy Officer

* Gi-Wook Do

Netmarble Corporation - CFO

* Young-Hoon Paek

Netmarble Corporation - Chief Business Officer

* Young-Sig Kwon

Netmarble Corporation - Co-CEO

================================================================================

Conference Call Participants

================================================================================

* Dong Hwan Oh

Samsung Securities Co. Ltd., Research Division - Analyst

* Dong-hee Kim

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

* Kyung Il Lee

Cape Investment & Securities Co., Ltd., Research Division - Analyst

* Minuh Cha

Goldman Sachs Group Inc., Research Division - Analyst

* Sang-Hyun Lee

IBK Securities Co. Ltd., Research Division - Analyst

* Seyon Park

Morgan Stanley, Research Division - Equity Analyst

* Stanley Yang

JP Morgan Chase & Co, Research Division - Analyst

* Taewon Kim

UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(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 third quarter earnings results by Netmarble.

This conference will start with a presentation followed by a divisional Q&A session. (Operators Instructions)

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

--------------------------------------------------------------------------------

Unidentified Company Representative, [2]

--------------------------------------------------------------------------------

[Interpreted] Good afternoon. I am [B. T. Kim] from Netmarble IR team. I'd like to, first of all, thank investors and analysts for listening in on Netmarble's 2019 Third Quarter Earnings Release Conference Call despite your busy schedules.

Joining this call we have CEO, Young-Sig Kwon; CBO, Young-Hoon Paek; CGO, Seungwon Lee; CSO, Chang-Hwan Seol; CFO Gi-Wook Do; and Head of Investment, ChanSeok Choi.

We will first deliver our third quarter earnings presentation, which will be followed by a Q&A session. Please note that the contents of today's presentation are brought to you before the company's independent auditor who has completed the audit. Therefore, some contents are subject to change based on the outcome of the audit.

And now we would like to invite Seol Chang-Hwan to deliver the earnings presentation.

--------------------------------------------------------------------------------

Chang-Hwan Seol, Netmarble Corporation - Chief Strategy Officer [3]

--------------------------------------------------------------------------------

[Interpreted] Good afternoon, this is CSO, Chang-Hwan Seol. Let me first give you a summary overview of the company's third quarter performance. Please refer to Page 3.

Q3 revenue was KRW 619.9 billion, up 17.9% Y-o-Y and up 17.8% Q-o-Q. EBITDA was KRW 118.9 billion, up 37.0% on year and up 90.9% on quarter. Operating profit was KRW 84.4 billion, up 25.4% on year and 154.2% on quarter. In the third quarter, we enjoyed top line growth, thanks to the full recognition of titles that we have launched in the last quarter. And consequently, profit also increased significantly.

Next page is on net profit. Q3 net profit was KRW 84.7 billion, up 53.7% Y-o-Y and up 122.9% Q-o-Q. Controlling interest net profit was KRW 79.2 billion, up 79.2% on year and up 105.7% on quarter. Net profit margin was 13.7% and controlling interest net profit margin was 12.8%, both improving greatly compared to the previous quarter.

Next page is on overseas revenue contribution. Q3 overseas revenue was KRW 423.4 billion, up 4 percentage points on quarter accounting for 68% of the total sales revenue. The driver was an increase in sales revenue from Japan with the full recognition of the Seven Deadly Sins. By country, Korea 32%; North America, 28%; Japan, 15%; Europe, 8%; Southeast Asia, 7%; and others at 10%.

Next page is on the game portfolio. As of third quarter, we continued to diversify our portfolio of games. By genre, RPG was 38%; MMORPG, 27%; Casual, 26%; and others at 9%. As of the end of Q3, top grossing games were in the order of: Marvel Contest of Champions, Lineage2Revolution, the Seven Deadly Sins, Blade & Soul Revolution, Marvel Future Fight, Cookie Jam, BTS World, Harry Potter, The King of Fighters ALLSTAR, Everybody's Marble and Seven Knights.

Next page is on the major costs. Q3 operating cost was KRW 535.5 billion, up 16.7% Y-o-Y and up 8.6% Q-o-Q. Labor cost was KRW 120.3 billion, up 18.2% on year and up 0.7% on quarter. Marketing expenses were KRW 72.3 billion, down 15.0% on year and down, as well, 13.5% on quarter as a result of pre-booking of marketing expenses.

Next is the key lineup for the fourth quarter of 2019. As of today, the Q3 earnings conference call, the company released Blade & Soul Revolution in Japan. And the King of Fighters ALLSTAR globally on October 22 and October 24, respectively. Furthermore, the company will release Frozen Adventures globally in November. And between the end of 2019 and early 2020, A3: Still Alive is scheduled to be rolled out in Korea and Magic: ManaStrike globally.

Lastly, I'd like to present our G-STAR 2019 lineup, including A3: Still Alive, a battle royale mode MMORPG genre, where Netmarble will showcase for the first time new titles, such as Magic: ManaStrike, based on the Magic: The Gathering IP; Seven Knights Revolution, which is our own IP-based casual MMORPG; and Ni no Kuni, developed from Level-5 and Studio Ghibli IP.

And now we will conclude the earnings presentation and start the Q&A session. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(foreign language) Now Q&A session will begin. (Operator Instructions)

(foreign language) The first question will be presented by Dong-hee Kim from Meritz.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] And I have 2 questions. My first question is more of a request to the company to share with us a detailed update on the scheduled release that you have planned for until the end of 2019. The second question is that in respect to your Q3 performance, we can recognize that the company is normalizing its earnings performance. Can we expect this trend to continue in the fourth quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Let me answer the first question. I am the CEO, Young-Sig Kwon. The first question you asked was related to our scheduled release for 2019. And as our CSO, Chang-Hwan Seol, already explained in his presentation, we have a global release scheduled for Frozen Adventures in November. However, the other titles that we are currently developing, we don't believe that we'll be releasing them within this year. They will be most likely to be released in the early part of 2020.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] I am CFO, Gi-Wook Do, and I will address your second question related to the outlook for the fourth quarter earnings performance. I'm not at liberty to be able to go into details. But what I can share with you is that due to the postponement of the release schedule for Seven Knights II and A3: Still Alive, at the company, we are taking a more conservative approach in terms of how we look at our performance in the next quarter.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

(foreign language) The next question will be presented by Kyung Il Lee from Cape Investment & Securities.

--------------------------------------------------------------------------------

Kyung Il Lee, Cape Investment & Securities Co., Ltd., Research Division - Analyst [6]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. My first question is related to your -- the current performance of the Blade & Soul Revolution, which is actually not performing so well. Could you share with us any plans that you -- the schedule that you have for the global release? And also please also share the global release schedule for the Seven Deadly Sins. Moving to my second question, it's related to the potential acquisition of Woongjin Coway. And there is some employment issue related to the [acceleration] of engineers of the company. And so could you give us an update on where you are currently with respect to the acquisition of the company?

--------------------------------------------------------------------------------

Young-Hoon Paek, Netmarble Corporation - Chief Business Officer [7]

--------------------------------------------------------------------------------

[Interpreted] This is CBO, Young-Hoon Paek. In respect to your first question, when we look at the performance of Blade & Soul Revolution in Japan, you do have to factor in that Japan MMORPG market is not actually growing as fast as Korea. On top of that, we recognize this difference, and that is why, for the future, what we have to focus on is to continue to do user acquisition and do timely updates so that we are able to support this title to be a long-run hit going forward.

In terms of the global launch schedule, we are targeting the first half of 2020 for this title. Moving to the scheduled release for the Seven Deadly Sins globally, the target is first quarter of 2020. And we'll do our best so that we have a very successful take on this game.

--------------------------------------------------------------------------------

Chang-Hwan Seol, Netmarble Corporation - Chief Strategy Officer [8]

--------------------------------------------------------------------------------

[Interpreted] This is Chang-Hwan Seol, CSO. And to answer your question on Coway, we are currently still in the process of doing due diligence on the company and there -- and as of now, nothing is confirmed. But when it comes to labor-related issues, this has an impact on the business environment. And thus I can say to you that it does have an impact on the deal.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(foreign language) The next question will be presented by Stanley Yang from JPMorgan.

--------------------------------------------------------------------------------

Stanley Yang, JP Morgan Chase & Co, Research Division - Analyst [10]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. And the first question is that recognizing the improved Q-o-Q performance of the Lineage2Revolution, I would like for the company to give me more color on what was the performance trend, both in Korea and in Japan. And my second question is related to your G-STAR lineup. Of course, the titles that are featured in G-STAR are the titles expect to perform very well in the future. But if possible, could the company just take one title that you think would be the best performing title going forward? And what would be the release schedule for that as well? And can you also explain what's the difference between Seven Knights II and Seven Knights: Tomorrow?

--------------------------------------------------------------------------------

Young-Sig Kwon, Netmarble Corporation - Co-CEO [11]

--------------------------------------------------------------------------------

[Interpreted] This is CEO, Kwon. And to address your first question on the improved performance of Lineage2Revolution. As you have noted, we have improved performance in the third quarter. This was mainly driven by the new character release called Kamael. And since then, we have seen improvement in performance in various indicators. And while we may not be able to do a full-blown launch all the time, our goal is to make sure that for us to maintain a quarterly schedule to do a continued update of the core content.

And to answer your second question on our G-STAR lineup, during the presentation, we shared with you the 4 projects that we have lined up for G-STAR. And these all 4 projects are very important, equally important. But I would have to say that earlier releases will get more attention from the company as a result. And so to just give you the overall rundown on the scheduled releases. A3: Still Alive, we target Q1 2020. ManaStrike, we're -- we have currently done the soft launch, and so it will also be included in the Q1 release. And in respect to Seven Knights II and -- we are also looking at the Revolution as well as Ni no Kuni, these 2 titles, we are targeting the second half of 2020.

And the last part of your question related to the difference between Seven Knights II and Seven Knights Revolution. We are developing these 2 games as a 2 different titles. And for the Seven Knights II, we have already completed the development process and are in the stage of just finalizing -- doing the final touches to really fine-tune the quality of this title. When it comes to Seven Knights Revolution, this is a casual-based MMORPG game, where the player actually enter the universe as well as enjoy the hero cards. And then using the various cards and being able to change, the user can actually enjoy playing various characters in -- by playing this game.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(foreign language) The next question will be presented by Seyon Park from Morgan Stanley.

--------------------------------------------------------------------------------

Seyon Park, Morgan Stanley, Research Division - Equity Analyst [13]

--------------------------------------------------------------------------------

[Interpreted] I also have 2 questions. My first question is related to the release of StoneAge M from China. And I'm sure that this also contributed to the improved performance of the company. Could you, if possible, explain the licensing, the distribution of this title? And second question, once again, related to the acquisition of Coway. And I'm wondering if the company can actually shed some color on related funding for the potential acquisition of Coway. To finance the acquisition, is it possible that the company may even consider possibly making some changes to its holdings of the NCSOFT shares?

--------------------------------------------------------------------------------

Young-Sig Kwon, Netmarble Corporation - Co-CEO [14]

--------------------------------------------------------------------------------

[Interpreted] This is CEO, Kwon. And to address your first question, in the third quarter, there was the StoneAge M China release and this also contributed to improving our top line performance. And the earnings from the StoneAge M China has been recognized under other revenue category. Just to give you a little bit more explanation that we had already developed a StoneAge mobile version for the iOS. And this was part of the overall global service build. And we just included the China as one of the countries that will be -- we release this title to.

And in respect to your second question, whether the company has any path to use our interest in the NCSOFT shares for the Coway acquisition, I have to tell you that nothing has been decided. So I also have nothing to comment on this question.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sang-Hyun Lee, IBK Securities Co. Ltd., Research Division - Analyst [16]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. The first question is you've already showcased in the last year G-STAR, the titles A3: Still Alive and Seven Knights II. I'm just wondering how much improvement or changes they have made to the versions that we have seen before. If you have done so, could you explain what changes have been introduced? And also, you have a scheduled release for the title called Ni no Kuni. Could you explain a little bit more about this game title? And I have also another question with respect to any updates related to the distribution of your titles in China?

--------------------------------------------------------------------------------

Young-Sig Kwon, Netmarble Corporation - Co-CEO [17]

--------------------------------------------------------------------------------

[Interpreted] This is CEO, Kwon. To address your first question. For the A3: Still Alive, the scheduled release date is actually delayed than what we had originally planned. It was because we believed that we really have to actually reinforce the content to make it a very entertaining MMORPG game. And the development is now complete. We're at the final stages just -- of just polishing the title before it's released. In respect to the changed schedule, we have also Seven Knights II and we also have to spend considerable time making additional improvements to this game to make it more game-friendly and entertaining, and to make sure that we have -- we do introduce a very distinct element of title within Seven Knights II when -- upon release. And so we are doing our best, and our target is to release this title in the second quarter.

And to give you a little bit more explanation on the title that we are working on. It's called Ni no Kuni. This is currently being developed by Netmarble Neo. And we have key developers who worked on Lineage2Revolution working on the development of Ni no Kuni. If you look at the overall background of this title, Ni no Kuni was a collaborative effort by a Japanese studio, Level-5, and Studio Ghibli and was originally developed as a console game. Now we take that console game and now offering it as a MMORPG game set, but we take on the classical work of Studio Ghibli and also use as much musical content from Hisaishi Joe as possible to include into our games title as well. As you play the Ni no Kuni title, you are able to enjoy a new storytelling, new scenario and new character, and we actually tailor-fit to make it work ideally in a mobile platform environment.

Interpreted And the last part of your question related to any update on the Chinese market. To the best of our knowledge, there have not been any significant changes to comment.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

(foreign language) The next question will be provided by Taewon Kim from UBS.

--------------------------------------------------------------------------------

Taewon Kim, UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming [19]

--------------------------------------------------------------------------------

[Interpreted] My question is really related to the company development policy as you release our strategy for the year 2020 and 2021. If I look at the performance of the company in the last few years compared to the competition, Netmarble was very successful in actually introducing more genres and also more titles than the competition. I'm just wondering if the historical trend will continue in the future as well. Or would there be a dramatic strategic shift in the way you are addressing the release and development of you game titles?

I would also like to ask the company to share specific targets in terms of how many titles you are planning to release for next year. I know that during this earnings conference call, you already disclosed the 2 titles. But I'm just wondering if the company can also explain, in this Q&A session, any very important new projects or new genres that you are working on.

--------------------------------------------------------------------------------

Young-Sig Kwon, Netmarble Corporation - Co-CEO [20]

--------------------------------------------------------------------------------

[Interpreted] This is CEO, Kwon. Please understand that I will not be able to go into the overall, the entire strategy that the company has for its games development. From the outside, we have been recognized as a publisher that has released many new titles every year. But you do have to understand that in terms of how the development of games are being done today, it's very different from what we've experienced a few years back. Because in the past, the development cycle -- life cycle for a title was relatively shorter. And that is why we were able to actually release more titles in a given year.

But in recent times, we recognize that for a well-made game, it takes up to 2 years to develop such a title. And that is why instead of just focusing on more quantitative growth, we are going to go for a more qualitative approach to make sure that we have a well-made, well -- high-quality and very complete game available to the users.

Moving to our strategic focus of genres, our -- primarily RPG will be the anchor that will be driving our overall games development. But from time to time, there will be attempts and forays into other areas, which have already done through the BTS World and Koongya Catchmind titles. And so we do try new things. And so once again, in summary, it's not how many titles that we release in a given year important for the company, we really want to be a quality publisher and we really want to release well-made titles.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

(foreign language) The next question will be presented by Eric Cha from Goldman Sachs.

--------------------------------------------------------------------------------

Minuh Cha, Goldman Sachs Group Inc., Research Division - Analyst [22]

--------------------------------------------------------------------------------

[Interpreted] My first question is really related to the scheduled release of your competitor's title on the -- on November 27. They are using the IP that you also use in your game as well. And so can the company talk about any cannibalization effect that you think the new title release will have on your game, Lineage2Revolution? And what are the countermeasures that you have come up with for this end?

Second is related to the stance of the company in respect to how you'll be disclosing your earnings to the market or communicating your earnings potential to the market going forward. Because you did come to the market to actually give the market information related to your interim performance, and the company said that it was in view of the -- to protect your investors. But this is not something -- this was the company -- this was something that the company did for the first time, even though in the previous times there were other gaps in terms of how you were actually performing to expectations. So what is going to be the company's stance going forward? I think it will be helpful to have some consistent message given to the market.

--------------------------------------------------------------------------------

Young-Sig Kwon, Netmarble Corporation - Co-CEO [23]

--------------------------------------------------------------------------------

[Interpreted] This is CEO, Kwon. And for Lineage2Revolution, it is true that there are always been a prevailing concern about any titles that will be released related to the similar genre. And when these titles were released in the past, as you know, Netmarble and Lineage2Revolution performed very well against these new releases. But for the title that you are referring to, because it is based on the same IP, it is the same mobile game genre, we have a little bit more concern compared to the past. But we do anticipate that there will be some impact. But just some impact, not a big major impact. And for the company, we continue to do content updates and -- to strengthen our retention of our users.

--------------------------------------------------------------------------------

Chang-Hwan Seol, Netmarble Corporation - Chief Strategy Officer [24]

--------------------------------------------------------------------------------

And this is Chang-Hwan Seol, CSO. And your second question is related to how we came to the market ahead of the Q3 earnings release. And I think that what we can say is that this is very much dependent on the market and the stock price situation.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

(foreign language) The last question will be provided by Dong Hwan Oh from Samsung Securities.

--------------------------------------------------------------------------------

Dong Hwan Oh, Samsung Securities Co. Ltd., Research Division - Analyst [26]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. This is related to the breakdown of your sales revenues. And I want to point your attention to the other revenue line item, where we are seeing that there was increase of [KRW 60 billion] Q-o-Q. Has this increase been driven by the other titles that are selling and has only a very small share of the revenue? And just wondering with the titles that are only contributing about 2% or less, you may have a lot of them, will they be enough to drive up this amount? Or has there been a one-off item that actually raised the increase in this item? Has there been a one-off sale in this area? Moving to my second question, it's related to any plan to increase your headcount? And can you actually shed -- or can you actually also give me some explanation related to what your marketing spend will be for 2020?

--------------------------------------------------------------------------------

Young-Sig Kwon, Netmarble Corporation - Co-CEO [27]

--------------------------------------------------------------------------------

[Interpreted] This is CEO, Kwon, and I will answer your 2 questions. To address your first question, there was not any one-off sales item included in the other revenue. Please understand that the main driver was the increase of the sales of the StoneAge mobile. Moving to the second question related to the company's plan to increase headcount and marketing budget, as we have many new projects lined up, we do have to hire more developers. So we will be increasing headcount when it comes to the development side but not on the servicing side.

And for our marketing budget, what you can actually use as an indicator is that as we have a certain number of titles to be released in a given year that will have a very large impact on how much marketing we spend for a given year, vis-a-vis the total sales revenue. But we don't anticipate that, that portion will be greater than what we had expended this year in 2019.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

(foreign language) And now we will close Netmarble's 2019 Third Quarter Earnings Release Conference Call. If you have any further questions, please feel free to contact the IR team. Thank you, once again, for your participation.