Good morning. I'm Lily from Kakao Games IR team. We will begin our first quarter earnings presentation. Today, I am joined by our CEO, Michael, and CFO, Terry. We will start with our CFO's presentation on Q1 2025 earnings. As a disclaimer, today's earnings release includes estimates of KIFRS-based consolidated statements, which are subject to change upon the auditor's review.
[Non-English content]
Good morning. This is Terry, CFO of Kakao Games. Under the goal of achieving global success, we reorganized the group, segmenting the area of expertise around global PC console and mobile games. We are also in the process of strengthening our global business capabilities and making human resources investment in order to nimbly react to changes in key overseas markets. Under the reshuffled organization, we introduced Odin Global end of April, and although we are still in the early stages, we see positive user metrics from North America and Europe.
We are thus closely monitoring feedback and performance from such new efforts. Also, to enhance level of completeness of new titles targeting the global market, our specialized groups organized by their expertise in terms of game genre, platform, and geographies are undertaking thorough validation in line with the CBT and release timeline. In marketing, we continue to broaden our community network in the Western markets, namely North America and Europe, and are strengthening local communication.
Through in-depth cooperation with strategic partners and opinion leaders, we are closely following up on local insights and feedback from test user pool, increasing the likelihood of success and market adaptability of our new global titles on the basis of a much more fine-tuned localized strategies. Since last year, Kakao Games embarked on divestiture of its non-core assets, revamping of business portfolio, reallocation of resources around core businesses, which were part of our selective focus strategy, leading to efficiency gains in terms of human resources and other expenses, while we continue to expand investment into PC, console, and global business.
In this process of improving the fundamentals, in the short run, we may be underperforming due to the absence of big titles, but starting the second half, we will drive top-line growth underpinned by the outcome of such improvement efforts and realization of global results. With that said, let me now run through the Q1 2025 financial performance of Kakao Games. On the back of absence of tangible results from new titles and natural erosion from longstanding legacy titles under service, consolidated revenue was down 31% year-over-year and 8% Q-o-Q, reporting KRW 122.9 billion, with operating loss reporting KRW 12.4 billion. In terms of revenue breakdown for Q1, against solid traffic from PUBG and recognition of deferred revenue last quarter from Path of Exile, PC game revenue was up 72% year-over-year and 30% Q-o-Q, reporting KRW 26.8 billion.
Path of Exile had a new season update last April, landing at the top of the game genre in terms of user metrics, and coupled with expedient communication incorporating user feedback, which was well received by our user base, we saw high retention rate in domestic as compared to global, helping to build up on the anticipation for its full official release. For PUBG, supported by collaboration with the PUBG studio, coupled with effective domestic marketing activities, we expect to be able to maintain the performance of PC games based on stable traffic ahead of release of new PC console titles in the pipeline.
[Non-English content]
In mobile games, despite launch of many competing game titles, our main live games, which are Odin and ArcheAge WAR, have shown stable user metrics once again attesting to their robust positioning in the game genre. However, due to modest initial performance from Valhalla Survival and revenue decline from games under longstanding servicing such as Uma Musume, mobile revenue was down 41% year-over-year and 15% Q-o-Q, reporting KRW 96.1 billion. Despite deeper competitive dynamics for domestic service, Odin sustained steady results underpinned by solid traffic from core users and continuation of the impact of its large-scale update end of last year. Also, end of April, following Taiwan and Japan, we expanded into global servicing into North America, Europe and Southeast Asia as we continue to build on Odin's IP awareness across the global markets.
ArcheAge WAR kept its revenue and metrics steady on the back of traffic inflow coming evenly from the user base following the second-year anniversary large scale update and launch of the growth server for the domestic services. For global services, we received positive feedback on user-friendly operations and servicing, which helped form a stable user base. In the second half of the year, we plan to further boost the fun factor which the game delivers through an integrated global war field update.
Grounded on core competitiveness of Odin and ArcheAge IP, Kakao Games will continue to work to grow them into a flagship global IP, thereby solidifying the brand equity and long-term growth potential in the global market. We are also planning on the launch of Goddess Order, a new title in the second half, so that we can strengthen portfolio's competitiveness and also to win global users and build full momentum behind top-line growth.
[Non-English content]
Next is operating expense. Q1 consolidated operating expense was down 18% year-over-year and 1% Q-o-Q to KRW 135.3 billion. In terms of expense breakdown, as we continued to control new hires and sustain efficient cost base, we increased investment for preparation of new titles and for global headcount, which drove labor cost increase of 5% Q-o-Q to KRW 40 billion, which is similar to levels last year. We will continue to optimize cost structure company-wide and keep annual labor at levels not higher than last year.
Marketing expense was up 52% year-over-year and 22% Q-o-Q to KRW 12.7 billion following CBT marketing and trailers for new global titles and for full-fledged pre-release content production. With the launch of CBT marketing for global users, we plan to expand strategic marketing in stages in line with market developments in order to drive interest in the global market and for the game shows. Also, for live game titles, we will focus more on deploying highly efficient marketing to make sure that marketing spend does not exceed 10% of our annual revenue.
Commissions are inclusive of what's paid to the marketplace and studios and infrastructure fees, and due to a shift in game revenue mix, total commission was down 34% year-over-year and 8% Q-o-Q reporting KRW 62.3 billion. Following impairment loss recognition of intangible asset end of last year, depreciation and amortization declined 4% year-over-year and 3% Q-o-Q reporting KRW 11.3 billion, while other expense inclusive of G&A expenses and other items fell 3% year-over-year but increased 1% reporting KRW 9 billion.
[Non-English content]
Kakao Games is currently entering the final phase of a fundamental repositioning of its core businesses. Our strategic initiative to enhance user engagement are demonstrating tangible results with key live service titles maintaining robust performance. In parallel, we are steadily generating new growth momentum through the global rollout of new titles and through continued platform expansion. We are also further strengthening our structural foundation to ensure flexibility amid changing market dynamics while delivering mid to long-term growth through competitive content and efficient operations. We would like to take this opportunity to express our sincere gratitude to all our shareholders and investors for your continued trust and support. This concludes our earnings presentation for the first quarter of 2025. We will now proceed to the Q&A session.
[Non-English content]
Now Q&A session will begin. Please press star one. That is star and one. If you have any questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two. That is star and two on your phone. In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions per each participant.
[Non-English content]
The first question will be provided by Hee-Seok Lim from Mirae Asset Securities. Please go ahead with your question.
[Non-English content]
Thank you for taking my question. You mentioned during the presentation about CBT. Could you provide us with an update as to the development, how the development is going for these relevant titles and the amount of anticipation that is building up for these games and also the size and the timeline going forward? Second question is, it seems your mobile revenue has come down quite significantly, and I presume that the reason behind this mostly would come from Odin. As we go into the second quarter, what is your projection in terms of a rebound in terms of mobile revenue and from Odin?
[Non-English content]
This is Michael. Responding to your first question on the CBT test and an update. I assume that since this CBT test mostly relates to Chrono Odyssey and ArcheAge Chronicles, which are our PC and console titles, I think it would be appropriate for me to talk about those game titles one by one. First, in terms of the core game system for Chrono Odyssey and the content development, it is mostly complete at this point. We actually ran a closed play test against more than 150 Western global users who are in North America and in Europe, and we've seen some encouraging results from such tests.
The feedback we received was that the immersive dark fantasy universe is well-rendered through the game, which is something that is not commonly found in games by Korean studios. The feedback we also receive is that the concept of going beyond time and space and overall game atmosphere, story and content that they blend well together. The action RPG style combo action is well-rendered within the game and that it uses various classes and weapons so that people can really enjoy the fun of battle throughout the growth stage of the character. We have received quite positive feedback and through these tests we were able to confirm that the overall quality has been enhanced.
[Non-English content]
For Chrono Odyssey, I can tell you that we are preparing to run a large-scale CBT against global user base through the Steam platform, and the CBT will allow global users to directly firsthand experience the open world adventure of growing the characters and the very immersive universe that this dark fantasy provides, as well as experience riveting and dynamic battle system. Through the combat between the classes, which would be quite exhilarating, we are making thorough preparation to receive positive feedback on the game ability.
Since it's going to be the first time that we will be showcasing the game through CBT, we are making full preparations. In terms of the CBT schedule, it will be announced sometime in May, and we're working under the goal of starting it during the first half. We will soon make official announcement through various different global channels. For your information, on our website, beginning early May, there is going to be an unofficial opening for the sign up of a CBT, so you can soon expect our CBT to take place.
[Non-English content]
In terms of the ArcheAge Chronicles, most of the core elements of the system is already developed, such as combat, growth, open world adventure, dungeon battles, housing and trading system for transactions between users. All of the core elements of the system is mostly complete. Right now, we're in the process of polishing the balance, the game, in order to elevate the play experience and the level of perfection of these game titles so that users can truly immerse themselves into the ArcheAge universe, connecting the narrative with the quest flow, providing unique combat and character grip using various classes and weapons and social plays like trade and party dungeons.
We're at this point making the final polishing on the game title. Like Chrono Odyssey, we're planning on closed play test against probably more than about 100 Western users, the global users in June before the official CBT. Based on the outcome of the closed user test, we are preparing to have global CBT most likely in the second half of the year. Of course, we will fully consider the allocation of our marketing resources and potential synergies that we could generate across our other AAA titles in setting the timeline. Through the release of the game reel at the Sony event, we were able to confirm that there were a level of global user interest. Once again, at this point, we are going through the final polishing stage.
[Non-English content]
Regarding your second question on Odin. Despite the launch of many other competing titles that actually entered the mainstream, Odin hasn't seen any user churns and was able to, with the introduction of a new class, we are seeing traffic on a Q-o-Q basis make a rebound. The top line from Odin also is maintaining a steady state. So at this point, our plan is to further enhance on user satisfaction by making improvements on the overall play environment and the structure.
Through a fourth-year anniversary update, which is slated for end of June, we are looking forward to another rebound in terms of traffic and revenue. Also, on the back of the good results that we are seeing from Odin Global, we are able to now see that the awareness of Odin as a brand equity has really been strengthened across the global markets, including Asia. I think it is forming the basis for Odin to really strengthen its market positioning. In the second half with the launch of Goddess Order, we are looking forward to another rebound in terms of our mobile revenue.
[Non-English content] Next question, please.
[Non-English content]
The following question will be presented by Seung-h o Choi from DS Investment & Securities. Please go ahead with your question.
[Non-English content]
Thank you for taking my question. I have two questions that I would like to ask. First is, in the second half you will be releasing Goddess Order. Would like to understand which market you will be targeting. Would it be the Western market or the Asian market? And what is the key characteristics of its core gameplay that could actually provide the fun factor for the global market? And second question is, you've made decision and you have sold your stake at Neptune. Would like to know as to why you sold Neptune and what is the purpose of the use of the proceeds that you gained from that sale?
[Non-English content]
Yes, this is Michael responding to your question about Goddess Order. Based upon the global servicing experience, we're currently working on and targeting this game title for different geographies. We recently ran a global test in May for major markets in Korea, Japan, North America, Europe, and these are the core markets that we will be targeting, and we have received some positive user feedback from such tests. Our plan is to go through soft launch in the month of June, and based upon the live data that we will collect, we will check the data, and we will carry on with the balancing of the game and do official launch during the third quarter of this year. In terms of the key characteristics of this gameplay, it adopts a dot graphic and a manual action, manual maneuver, and these manual controls work as a unique differentiator for this game.
It provides the fun of PVE and character growth, an immersive story and cut scenes, and it also offers a very unique combat style for each and every one of its characters. We are in the process of making Goddess Order a fun-to-play game. Now, as you know, LoadComplete is the developer of this game, and they have prior experience of making Crusader Quest into a success with a cumulative global download of about 25 million.
There actually is already a preexisting global fandom for Crusader Quest in key markets, including Japan and some other Asian countries. We think that this is going to be a positive for us when we try to onboard and acquire new users with the release of the game. We will expand the user coverage by taking the most optimal approach on hardware specification. We will also be adapting a business model that is reasonable enough so that we can enhance and maximize accessibility to the game.
[Non-English content]
Responding to your second question on the sales of our stake in Neptune. This is the CFO responding to your question. As mentioned before, Kakao Games, starting last year, had adopted a strategy of selective focus, based upon which we went through reorganization of our business portfolio. We ran many different simulations, and we studied the Neptune holdings as a way in which it will be able to provide a growth momentum. After running those reviews, we came to the conclusion that in light of the synergies that will be generated with Kakao Games as a whole, and most importantly, whether it will contribute to enhancing the corporate value, our decision was that it was not meeting that expectation, and that was the basis upon which we decided to sell off our stake.
[Non-English content]
With the sale of our stake at Neptune, that has an impact of increasing our liquidity. In terms of where we will be using that proceed, it is not yet determined. However, our priority will be to make investments so that we can expand the portfolio of our new title pipeline, and if need be, we will also be able to review any potential investment into other equity holdings. In terms of the investment, it will be for the purpose of enhancing the competitiveness of our game portfolio. It will be viewed from that light. And if from a short term, there is no opportunity for us to actually make that equity investment, then we could also consider using that proceed to repay part of the debt.
[Non-English content] Next question, please.
[Non-English content]
The following question will be presented by Young-san Kwon from Daiwa Securities Capital Markets Korea. Please go ahead with your question.
[Non-English content]
I just have one question regarding your financials and the objectives that you've set because we are continuously seeing operating loss streak in terms of a turnaround in your earnings. I ask this question because the visibility on your revenue and earnings going forward is actually quite low. Of course, we have expectations for new titles that's coming up, but would like to gain some color as to either your margin or your operating profit or net profit. When can we be expecting a turnaround on a quarterly basis? And also if you could guide us on what your marketing spend would look like, as well as if you could share with us some of your financial objectives, either for this year and it will be greatly appreciated if you could also share what your outlook is for next year as well.
[Non-English content]
This is the CFO. Thank you for that one question. It has quite multiple complex elements into it, so I'll try my best to help provide that information so that it could help you with your analysis as well. Up until the first half of the year, because there's absence of triple-A titles, we expect that the current level of revenue and margin will most likely continue on. The first half is a period for us to really focus into improving the fundamentals of the company. That is our objective. As we move into the second half, Goddess Order, which we've really prepared hard for its release, is now eventually going to be introduced. Our number one priority for us in the second half of the year is to, once again, build the trend for growth.
[Non-English content]
With Goddess Order signaling the start, there are other titles like Project Q by Lionheart Studio and Chrono Odyssey that will follow in terms of the new title release. Basically, starting the second half of this year, moving on to next year, we are going to be able to drive that trend in terms of top line growth. I don't believe this is being too aggressive. I think this is mostly achievable. Now, when it comes to when we will see improvement on the profit, the bottom line, our objective is to drive that bottom line improvement from the second half of this year, but from a more, I guess, in terms of visibility, I expect the tangible results may start to emerge starting beginning of next year or within the first half of next year.
[Non-English content]
Also, you've mentioned marketing spend as well. Marketing spend and labor cost are the key expense items for us. In terms of labor cost, I've mentioned during the presentation that we will keep it under the level of last year's full year labor cost. In terms of marketing, we've ran ample amount of simulations in order to make sure that we spend marketing efficiently. So we have the capacity to be able to fully invest into new titles while being conservative with the live ongoing games. And our objective and target is to control that marketing spend below 10% of annual revenue. Now, driving profitability with cost efficiency inherently has limitations. For us at Kakao Games, our foremost important objective is to drive revenue growth. Basically in the second half of the year, that's where we're going to focus on, revenue growth.
[Non-English content]
This is Michael. Just adding on to what our CFO has mentioned. Since this is an earnings release, I'm sure that the shareholders are very much interested in what the financial outlook is and what the numbers are. I hope you understand that we do need to be a bit cautious, and we can't be really going into all of the details. Having said that, we have multiple new titles that are upcoming in the second half of the year, and it also includes triple-A titles as well. We're working very hard towards making these titles and having them land in the market well. For instance, if you look at Odin Global, aside from the so-called RPG powerhouses like Korea, Japan and Taiwan, we've been able to see quite steady metrics in terms of the start of Odin Global, and we think that this is a positive sign.
Since we've been making preparations to go global over the past year and we are seeing some initial results, based upon that, we are looking forward to some meaningful results going forward. A couple of initiatives, if we could share — our subsidiary, Ocean Drive Studio, has come up with God Save Birmingham, and the initial game reel that was released really raked in quite a high number of views. There's also a lot of work that's going into Chrono Odyssey as well as the upcoming titles by Lionheart Studio. With that said, in the second half of the year, as our CFO has mentioned, we will be able to see some visibility in terms of our top line revenue growth, and we are making thorough preparations to make that happen.
[Non-English content] Next question, please.
[Non-English content]
The following question will be presented by Jin-Gu Kim from KIWOOM Securities. Please go ahead with your question.
[Non-English content]
Thank you. I just have one question. In terms of your global expansion for PC and console games, aside from what you already mentioned, Chrono Odyssey and ArcheAge Chronicles, are there any other titles that we should keep a close watch on?
[Non-English content]
Yes, this is Michael. As I've mentioned briefly in my previous answer, we have subsidiaries, Ocean Drive Studio and XL Games, who've been developing PC console games that target the global market, and we've been doing that work over the past four to five years. There are several new titles that are under the pipeline, and one of the examples that I can cite is God Save Birmingham. Even without any full-fledged pre-marketing, we were able to, in a very short period of time, receive quite good response in terms of viewership.
Also, Ocean Drive Studio built up knowhow against its core user base over the years, developing and servicing games on the Steam platform, and they have games like Section 13 and Lost Eidolons: Veil of the Witch. And unlike other types of zombie or survival games that are mostly hack-and-slash combat, this game actually focuses on non-combat content. And based on the physical engine, it actually delivers lively survival game elements, which is really hailed by the global user community.
On May 8th, we've set up a booth at PAX East, which will start from tomorrow — that is local time — and it will give an opportunity for players to really get a sense of the game so that we can continue to build up on the anticipation. We will leverage the experience of Ocean Drive Studio, who has abundant experience in servicing games globally across the Steam platform, and we will closely communicate and work with the community so that we can look forward to building a growth momentum.