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Edited Transcript of 263750.KQ earnings conference call or presentation 8-Aug-19 11:00pm GMT

Q2 2019 PearlAbyss Corp Earnings Call

ANYANG Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of PearlAbyss Corp earnings conference call or presentation Thursday, August 8, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kyung In Jung

Pearl Abyss Corp. - CEO & Director

* Seok Woo Cho

Pearl Abyss Corp. - CFO

* Young Heo Jin

Pearl Abyss Corp. - COO

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Conference Call Participants

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* 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

* Stanley Yang

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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[Interpreted] 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 2 quarter earnings results by Pearl Abyss. (Operator Instructions) Now we shall commence the presentation on the fiscal year 2019 2 quarter earnings results by Pearl Abyss.

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Unidentified Company Representative, [2]

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[Interpreted] Greetings, I am [Jong Jin Gyu], Head of the Finance team at Pearl Abyss. First of all, I express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2019 Q2 Pearl Abyss earnings presentation.

Before elaborating on today's business results, I would like to ask for your understanding regarding the following: The financial and business results contained in today's earnings release has been prepared for the convenience of investors and is subject to change depending on the final closing of our books. In addition, the accuracy and completeness of the financial and business results and the earnings results material are not guaranteed, and the company is not obliged to give updates of the accounts given after this date, so please take these factors into consideration.

We have here with us in the earnings presentation today our CEO, Jung Kyung In; CBO, [Kim Jong Man]; CPO, Heo Jin Young; and CFO, Cho Seok Woo. We will first hear the business performance presentation highlights from our CFO, Cho Seok Woo, and then engage in a Q&A session.

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Seok Woo Cho, Pearl Abyss Corp. - CFO [3]

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[Interpreted] Greetings. I am Pearl Abyss CFO, Cho Seok Woo. Once again, thank you for taking part in our company's earnings conference call despite your busy schedules.

First of all, I would like to elaborate on the major business activities and results during Q2 2019. In Q2, we had positive results for all IP, including Black Desert IP, EVE Online IP as well as in diverse platforms, including PC, mobile and console, and achieved record-high quarterly revenues.

In the case of Black Desert, in May, we converted to a direct publishing model in Korea. For successful service conversion, we established the system preemptively so that the user information could be migrated appropriately and set up servers and network.

In addition, we prepared many diverse events so that many users can return to Black Desert and enjoy our game once again. As a result, we were able to have stable service migration. And also as a result, after direct publishing, we had a great improvement in user indicators, including a 10x and 15x increase in new and returning users, respectively as well as more than a 2x increase in daily users.

In addition, we received positive feedback from users by providing rich content to enjoy, including simultaneously updating a new class, Shai, in all countries.

Black Desert Mobile has continued to grow following the previous quarter. In Korea, stable revenues and user flow continued. And in Japan, which was considered to be barren land for mobile MMORPG, continues -- revenues are continuing until now, even 7 months after the launching.

In console, stable revenues are continuing. From [Wayne], the Xbox subscription model, Xbox Game Pass, has been initiated. And after that, user indicators have improved and including more than a 2x increase in DAU has taken place and we have seen positive financial results. Most of all, the stable game revenues continued, and this quarter became a watershed for our console industry to expand in the future.

EVE Online also grew compared to the previous quarter. Not only continuous content updates were made, but also changes were made to provide new experiences to users. As a result, we had positive financial performance.

We also strengthened user context with diverse message. At E3, we held Into the Abyss event. And in Korea, we held a Heidel banquet. And in Russia, we held the Voice of Adventures event and proposed a blueprint of Black Desert to the users and collected their opinions.

We had events like the EVE Invasion Tour and Guild dinner where we gave subsidies to users and we met our users more closely and, through diverse collaborations, enabled high familiarity with our IP.

In addition, we have established Black Desert TV for communication channel diversification and have strengthened GM note, showing that we thought hard about and put into practice how we could more closely communicate with our users.

We are continuing technical challenges to preemptively respond to the changes in the market environment. Game engine development is a case in point. The new engines used in the new game development are planned to have superior graphics quality and, at the same time, maintain a fast development speed. We expect the level of our games to be heightened to a higher level.

In addition, we are considering a large-scale multiplay server technology where more than 10,000 users can be connected simultaneously and play at the same time. We are currently working on the engine server technology developed by Hadean to converge to EVE IP through a game called EVE: Aether Wars. Live test is being done, and if game mobility is enriched, we expect that new types of attempts that didn't exist in the past could be made. We will not rest on our current technical capability and continue to take on technical challenges to rapidly respond to the new market.

Next, I would like to elaborate on Q2 financial performance. Our operating revenues rose 14.9% Q-o-Q to KRW 152.3 billion and posted a record-high operating revenue following the previous quarter. Operating profit and net profit increased 212.6% and 266%, respectively, posting KRW 56.9 billion and KRW 51.6 billion, respectively. Operating profit ratio and net profit ratio each recorded 37% and 34%.

I would like to explain in more detail about the operating revenues. First, operating revenue for the IP. The operating revenue from this quarter's Black Desert IP recorded KRW 137.4 billion and increased 16.3% Q-o-Q. This was thanks to the 3 months of revenue recognition of Black Desert Mobile Japan which was launched in the previous quarter as well as the stable growth of Black Desert console revenues. In the case of EVE Online, operating revenue posted KRW 14.9 billion, a 3% growth Q-o-Q.

Regarding the regional operating revenue, in Q2, 3 months of Black Desert Mobile Japan revenues were recognized, leading to Asian region revenue ratio of 45%, a 3% increase Q-o-Q. In addition, 3 months of Black Desert Xbox North America, Europe revenues launched in March was recognized, and the ratio of NA, European region revenues was 28%, a 4% increase Q-o-Q.

Next, I would like to explain the operating profit from the different platforms. 27% of the Q2 operating profit was from the PC platform, and 62% was from the mobile platform. 11% of the total revenues was from the console revenues, and stable revenues are continuously being maintained.

Taking into consideration the launch of PlayStation 4 and Black Desert Mobile global launching in the second half of this year, the mobile and console platform revenue ratio is expected to rise.

Next, I would like to elaborate on the operating expenses. Q2 operating expenses posted KRW 95.4 billion, a 16.7% drop Q-o-Q.

In the case of labor costs, KRW 9 billion of incentive payment effect in Q1 faded in this quarter, and it recorded KRW 25.5 billion, a 25.1% drop Q-o-Q. The ratio of labor costs compared to revenues was 16.7%.

For your reference, as of Q2 end, the employee head count increased by 69 head count compared to the previous quarter, and the total number of employees are 1,074. The numbers of developer resources are 635 developers, 59.9 -- 59.1% of the total head count. With the service expansion and development of new games, we expect the hiring of talented HR to continue for the time being.

In the case of commissions, with the rise of the mobile and console platform revenues, it posted KRW 43.8 billion, a 6.5% increase Q-o-Q. The ratio of commissions to revenue is 28.8%.

In the case of advertising costs, the marketing cost for Black Desert Japan and Black Desert console North America faded, posting KRW 15.4 billion, a 49% decrease Q-o-Q.

Lastly, I would like to describe the major highlights for Q3 of 2019 as well as for the second half of this year.

In order for us to become the world's best game studio in the world based on stable IP, we are doing our best for the continuous IP expansion and to secure new IP. First, to improve the continuous IP values, we will strengthen gameability. As the game industry competition is getting fiercer, strengthening IP is playing an important role in maintaining profitability, and we will engage different efforts to have a competitive edge. We will continuously update content, including updates of new characters and new regions in all areas, including PC, mobile and console. In addition, we will provide rich content, including Great Expedition updates and continuously expand PVP contents so that diverse types of users can be satisfied. We are not only focused on game content expansion but also are improving user interface and making improvements for early users to adjust. By improving user accessibility, we will work hard so that more users will enjoy our games. We are continuing to have revenue diversification by utilizing the IP that we already own.

For regional expansion, we plan to have the Black Desert Mobile global launching and Korean translation of EVE Online in Q4. We plan to start premarketing and prereservations for Black Desert global launching from Q3. We are also expanding our platform. We are preparing to launch Black Desert PS4 version, and we are preparing for EVE: Echoes, which we are developing by collaborating with NetEase. In particular, we're working hard so that we can have better results for the PS4 version that we plan to launch on August 23 based on the many lessons from existing Xbox service.

Apart from this, we are developing many spinoff games using the IP that we already own. Shadow Arena, which uses the Black Desert IP, which is a proximity war-type battle royale game that we have already serviced, so we will work hard to launch it within this year.

As a game using the EVE IP, there is a EVE at Terra Wars. EVE at Terra Wars is a battleship war game between users where more than 10,000 users can connect at the same time and have multiplay. The multiplay service technology used to realize this game is expected to become a basis for a new set of games. These games seem to be more experimental games than blockbuster games, but we expect these to greatly help the success of the currently service games as well as the games we will service in the future. We are also developing new IPs, including Project K and Project V. We are working hard to create a differentiated IP unique to Pearl Abyss, and we are preparing to disclose some of the projects within this year after considering the appropriate timing and period.

In addition, in the new games that will be developed within this year, there will be disclosure of not only Project K and Project V but also Projects CD for the first time. We expect that Project CD will become a game that will clearly show what kind of game Pearl Abyss will develop, what kind of direction we will take in the global market and for what reason we have chosen the difficult challenging road engine development to produce our games.

Going forward, everyone here, from the CEO to all the employees, are doing their best. We look forward to your continued support and interest. Thank you very much.

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Unidentified Company Representative, [4]

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[Interpreted] With this, we will conclude Pearl Abyss 2019 Q2 business results presentation and start the Q&A session.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) The first question will be given by Mr. Eric Cha from Goldman Sachs.

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Minuh Cha, Goldman Sachs Group Inc., Research Division - Analyst [2]

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[Interpreted] I actually have 2 questions, and the first is about the schedule of your product launching because many investors are interested in the schedule. I know that you have talked about Project V and Project K many times. But today, you have mentioned Project CD, and we do not have much information about Project CD yet. So you have mentioned that you might disclose more information about Project CD within this year. But if you can give us some rough information about the schedule, it would be greatly appreciated.

The second question is about the Q-o-Q revenue trends of Black Desert Mobile Korea because I don't think it was clearly presented in the earnings presentation. So it would be great if you can also elaborate on that for us.

And I know that stabilization of Black Desert revenues in Japan has not stabilized yet. So when do you think it will stabilize?

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Kyung In Jung, Pearl Abyss Corp. - CEO & Director [3]

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[Interpreted] First, I would like to answer your question about the new product pipeline. Currently, we are developing 4 new games. It is not only Project K and V that we have mentioned before but also Shadow Arena that we actually showcased into the Into the Abyss event and Project CD that we have mentioned in today's earnings release.

Project K and V are respectively a shooter type of game and a casual genre type of game, and we are developing them based on our next-generation engine.

Shadow Arena is a proximity battle royale type of game, and it's being developed on basis of a PC platform. It is meaningful, of course, because it is a new game, but also because it holds many different experimental factors. So we believe that it will bring great inspiration and know-how to our company.

I know that you are very curious about Project CD, and it is a completely different IP apart from Pearl Abyss -- or the Black Desert IP. And it is a blockbuster RPG that we are developing, targeting global users. We are considering having this launched in a console platform at the global main platform. And going forward, we are also considering PC and mobile cloud platform. So we are committed to the development.

For Shadow Arena, as was planned, we plan to actually launch it and show it to the market within this year. However, for our other games, we are going to actually keep attention on the development status, and we will give you more detailed information when we believe it is the appropriate time.

Regarding what kind of games are our new games and what kind of direction they have in its development, we will actually decide on the appropriate timing and place and actually give you more details.

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Young Heo Jin, Pearl Abyss Corp. - COO [4]

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[Interpreted] Your second question was about the regional revenue trend for Black Desert Mobile and the future trend -- future prospects. Black Desert Mobile is being stably serviced currently in Korea and in Japan. To give you some update about the Korean service status, for Black Desert Mobile, despite the launching of many competitor products in the first half of this year, we are very well maintaining our top position in the revenues. In particular, from December of 2018 until now, we are maintaining our continuous monthly revenue stream, and it's showing a very stable revenue flow. According to App Annie, which is a mobile data analysis platform, it was said that Black Desert Mobile, in the second quarter, Korean games consumer expenses actually ranked #3. So these results show that the competitiveness of Black Desert Mobile is being well maintained even at this time.

In Q3, we are going to add more attention to the game and have more growth so that we have new hunting areas, including Hadum's Realm and Great Desert and other rich updates for gamers to enjoy. So we're going to have more of the diversity offered to our gamers.

For our Japan services after our launching in -- on February 26, we were ranked actually #1 in popularity ranking for 3 weeks and #2 in terms of highest revenue. These results continued in Q2 as well. We are currently competing with the games in the top 10. And in the Japanese market, which was touted to be a barren land for Korean MMORPG, we are being actually reviewed as having very stable settlement.

It is true that the first initial launching effect has decreased somewhat. However, from 4 months after the launching, we are seeing stable maintenance of monthly revenues. So we believe that we have now the fundamentals for us to have long-term success. However, we will not be satisfied with these results, and we will have good maintenance of our content update cycle, which are currently in the waiting. And we will work so that we can have higher performance going forward.

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Unidentified Company Representative, [5]

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[Interpreted] Thank you very much. It was our CEO, Jung Kyung In, and our CPO, Heo Jin Young, who provided the answers.

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Operator [6]

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[Interpreted] The following question is by Mr. Stanley Yang from JPMorgan.

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Stanley Yang, JP Morgan Chase & Co, Research Division - Analyst [7]

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[Interpreted] And I actually have several questions. My first question is about the current status of Black Desert in Korea. Because I think during the presentation, you mentioned what was the current status for Black Desert in Q1. But I think that in July and in August, the rankings have dropped somewhat, and I think your revenues probably have also dropped. So if you can give us more details about the status of Black Desert in Korea for Q3, it would be greatly appreciated. I know that the Desert content proved to be a great turnaround for the PC game, but I don't think you have that in the mobile game yet. So are you satisfied with the current revenues, ranking? Or do you expect a turnaround going forward? Can you elaborate more on that? It will be greatly appreciated.

My second question is about Project CD. You have mentioned that Project CD is actually expected to be a AAA type of game, so that I believe your company has very high expectations about the game. And you mentioned that you can have more details disclosed for different games. So I'm curious whether it will be just 1 game out of Project V, K and CD or will it be more detailed information about all 3 projects. So I'm curious about the current development status of your games.

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Young Heo Jin, Pearl Abyss Corp. - COO [8]

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[Interpreted] So I would like to talk about the current status of Black Desert Mobile that you were asking about. For Black Desert Mobile, as was mentioned in the presentation, for the Korean services, the trend actually is quite similar for July and August. You might think that we seem to be actually falling from the charts in the ranking, but it is because of a temporary effect of the launching of other competitor games. But when you see our revenues, it's being maintained very stably.

We also have provided enriched fun and content to our new users and our existing users because we had the launching of [LAN] and also the Hadum's Realm in July. And as you mentioned, Great Desert will provide new fun and opportunities for our users. And although it is being updated, we are seeing a bit of a delay. However, we are making full preparations, and we fully expect a turnaround with the new addition.

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Kyung In Jung, Pearl Abyss Corp. - CEO & Director [9]

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[Interpreted] So for the next question, you mentioned about how much of the new games we can actually disclose in Q2 and what is the current development status of Project CD. Actually, regarding releasing more details about our new games, Project V, K and CD, we plan to actually give you more information and detail all within this year, but the level of disclosure of the games will be different for the different projects. To give you more information about Project CD, it encompasses the great amount of experience Pearl Abyss has actually acquired and the insight we have acquired when we have been developing Black Desert. And through Black Desert, we also have success in the PC but also in the console as well. So we have seen proven success that MMORPG can also succeed in the Western market based on console.

In particular, I think we can talk about the market opportunities based on the multiplay game type of nature of RPG games. Based on this type of experience, we are actually enforcing more of our gameability so the users that are used to and are very much enjoying consoles can also enjoy this game fully. Actually, it might be somewhat different from a traditional MMORPG game like Black Desert, but it will be a game regardless of whether it's console or a PC that many users can enjoy.

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Unidentified Company Representative, [10]

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[Interpreted] It was our CPO, Heo Jin Young, and our CEO, Jung Kyung In, who provided the answers.

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Operator [11]

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[Interpreted] The following question is by Mr. Dong-hee Kim from Meritz Securities.

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Dong-hee Kim, Meritz Securities Co., Ltd., Research Division - Analyst [12]

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[Interpreted] The first question is about the console revenues in Q2 and if you can actually classify them into packages and items. And can you share with us the accumulated sales figures for Xbox if you can? You also mentioned that Black Desert PlayStation will be launched from August 23. So could you give us any update on the preregistrations or prereservations and what kind of expectations the company has?

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Unidentified Company Representative, [13]

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[Interpreted] I would like to answer the question about Black Desert Xbox One, and we actually launched it on March 4 in the North American and European region and are continuing stable services.

In the beginning of the launching, we had more focused revenues than sales for packages. But as we see -- as we have seen the service progress, in-game settlements became more increased, and we are seeing similar revenue flow like Black Desert PC.

In particular, as of May, we started to have Game Pass service, which is the subscription game model within Xbox. And through this, we have continuous user inflow, and the in-game revenues following this is very much increasing soundly.

Black Desert PS4 launching is expected to be on August 23. Apart from the North American, European region, where the existing Xbox is being serviced, we are preparing for the Asian region launching, including Japan and Korea.

Taking into consideration the console market share for those regions by PlayStation, we expect that we will have positive results that go beyond the Xbox results.

Actually, we started the PlayStation preorders from July 3, and compared to Xbox, we are seeing great success with more than 30% higher numbers compared to Xbox in the same period.

In particular, unlike for Xbox, although we did not implement a great amount of premarketing expenses in the beginning, we are being very encouraged by the fact that there has been high numbers of orders.

In addition, from today, where we have the earnings release to the 12th, we are going to have OBT, and we expect to have a preboom of effect through this.

We believe that Black Desert PS4, like Xbox, will become another stable revenue source.

Interpreted It was our CBO, [Kim Jong Man], who provided the answer.

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Operator [14]

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[Interpreted] The following question is by Mr. Dong Hwan Oh from Samsung Securities.

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Dong Hwan Oh, Samsung Securities Co. Ltd., Research Division - Analyst [15]

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[Interpreted] I have 2 questions. First is about the Q2 Black Desert PC revenues. And compared to the previous quarter, I know that, because you have the direct publishing in Korea, your Korean revenues probably grew, but the revenues seem not to have a change so much. So does that mean the revenues fell for Black Desert PC in other countries apart from Korea?

Second question is about Project CD. You mentioned that console development will be prioritized for that project. So does that mean that you are corresponding to the streaming platform?

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Young Heo Jin, Pearl Abyss Corp. - COO [16]

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[Interpreted] I would like to answer your question about the Black Desert PC status. Black Desert is providing stable service and is expanding the directly publishing regions and is continuing very great performance in all countries that we service.

In the case of Korea, after conversion to direct publishing, we have seen improvements in user indicators and have had positive financial results. However, there is a fact that the profit recognition period, which was reflected in Q2, was not long, and we have an increase in the marketing cost for service conversion and migration. That is why we believe that the effects will be shown more clearly in Q3. And we assure you that the indicators have been increasing and we have seen good results.

And in Q2, we had very sizable updates, including the new character, Shai, launching, and the fantasy horse, Doom. So we have these types of updates in all countries that we service and receive great feedback from our users. So we can say that in other regions as well, we are seeing stable revenues.

Regarding our Black Desert games, well, this is based on our IP, and we believe that this is very important to have long-term stability. So we are not shying away from making investments, and we are going to continue on with this trend going forward.

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Seok Woo Cho, Pearl Abyss Corp. - CFO [17]

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And the reason why it seems that the Black Desert Online revenues haven't been increasing much despite the Korean direct publishing is because of the revenue deferral that is on an accounting basis. And you can consider it to be a similar effect that actually took place for Black Desert Xbox console in the previous quarter.

So we actually are understanding because it has been a very long time since we have had Korean services of Black Desert Online to our users, and we have many faithful users playing our Black Desert Online game. So you have to take into consideration the fact that the revenue recognition period, the deferral effect is longer than others. So that is why this revenue recognition has been delayed, leading to what might seem to be that of an increase, but actually, it is not.

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Kyung In Jung, Pearl Abyss Corp. - CEO & Director [18]

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[Interpreted] We are also developing Project CD so that we can respond to the streaming platform. And regarding whether we're going to launch it on a streaming platform, we're going to keep an eye on the market status, market situation and then make a decision later. I mentioned that we are prioritizing on the console, but we are also considering simultaneous launching of console for PC or console for streaming.

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Unidentified Company Representative, [19]

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[Interpreted] The answers were provided by our CPO, Heo Jin Young; CFO, Cho Seok Woo; and CEO, Jung Kyung In.

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Operator [20]

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[Interpreted] The following question is by Mr. Kyung Il Lee from Cape Investment & Securities.

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Kyung Il Lee, Cape Investment & Securities Co., Ltd., Research Division - Analyst [21]

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[Interpreted] I have actually 2 questions. And the first question is based on the 3 projects or 3 games that you are developing based on your next-generation engine. You mentioned in your comment previously that the speed of next-generation engine development will enable more acceleration. So does that mean compared to Black Desert, after all the 3 games have been launched, it will be much quicker for you to expand your platforms or to expand your regions compared to Black Desert?

Second question is about EVE: Echoes development. It seems that NetEase is also putting great importance and significance in EVE: Echoes in their lineup. So can you give us more information about its detailed launching?

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Kyung In Jung, Pearl Abyss Corp. - CEO & Director [22]

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[Interpreted] Let me give you an answer regarding your questions about the next-generation engine, new game development and the timing of its launching. When we compare the new generation engine to the Black Desert engine, you have to take into consideration the Black Desert engine was first developed for PC platform.

And after the Black Desert PC platform was launched, when we actually had the engine that was exchanged around or updated for us to have the Black Desert Mobile, we did not actually have to develop a completely new engine, but still, we have to put in many efforts and we had to make many developments so that we can have the adjustment of the engine. So it took quite a long time for us to accomplish this.

And for console, likewise -- like mobile, it was not like we had to completely develop a new engine from the beginning. However, we have to have the porting issues with Xbox and PlayStation that were new to us, and it was challenging for us to have the UI integration as well so that was why it took quite a while for us to have this developed.

Because we have had great experience in this, for our next-generation engine development, from the beginning, we consider the PC console and mobile platforms. So although for the content development of our new games it might take some time, for engine development, it will be much quicker than before.

And your second question of what about EVE: Echoes? Based on the EVE IP, the mobile game EVE: Echoes is currently being developed by NetEase. Regarding the launching in China, the schedule can actually change depending on the license that will be given in the future. So we will give market guidance as soon as it is confirmed.

In addition, apart from the Chinese launching, the EVE: Echoes global version is being developed by NetEase. In addition, NetEase actually, in May, had said in their own game conference that they are starting beta testing from Q4. And that is why they are also developing the global version of EVE: Echoes by NetEase.

And we believe after the beta test, we will have the final scheduling following the user feedback. And because most of the EVE online users are in the Western market and because it is already a very famous IP, we believe that the EVE: Echoes global version can also lead to great results.

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Unidentified Company Representative, [23]

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[Interpreted] Our CEO, Jung Kyung In, has provided the answer.

With this, we will conclude the 2019 Q2 earnings presentation by Pearl Abyss. Thank you for your participation.

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Operator [24]

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[Interpreted] This concludes the Fiscal Year 2019 2 Quarter Earnings Results by Pearl Abyss. Thanks for the participation.

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