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Good morning. I'm Lily from Kakao Games IR team. We will begin the third quarter 2024 earnings presentation. Today, I have with me our CEO Michael and CFO Terry. We will start with the CFO's presentation on Q3 2024 earnings. As a disclaimer, today's earnings release includes estimates of K-IFRS-based consolidated statement which are subject to change upon the auditor's review. Additionally, to enhance comparability, the financial statement for the previous quarter and the same period of the prior year have been prepared in accordance with the current standard of the current period.
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Good morning. I'm Terry, CFO of Kakao Games. I will first provide you with an update on changes to the accounting treatment for the third quarter. To focus company's resources to building new game lineup, we transferred 37.6% of Sena Technologies stake out of 53.6% holding as of end of Q3 because we felt that the synergies were not visible enough. As such, Sena Technologies has been deconsolidated and as the business had meaningful impact on the revenue and operating profit of Kakao Games, we reclassified them the P&L from discontinued operations in the financial statement. Regarding the sale of Kakao VX, no confirmed decision has been made yet, but as we decided to first withdraw from golf merchandise, health platform, and golf- related NFT businesses in step with the company's business rationalization efforts, these businesses are now captured under P&L from discontinued business as per the accounting standard.
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Now, moving on to the financials of the third quarter of 2024. Despite solid metrics driving top line revenue from core PC and mobile titles on the back of downward stabilization of publishing titles that were released in the first half, i n absence of new titles, Q3 consolidated revenue declined 14% year-over-year and up 5% Q-over-Q to KRW 193.9 billion. As the share of in-house developed titles that have higher margin came down, operating profit fell 80% year-on-year to KRW 5.7 billion. Let's now take a look at Q3 revenue breakdown. For PC game, impact from extensive collaboration update continued from PUBG, driving PC game revenue up 196% year-over-year and 109% Q-on-Q, reporting KRW 34.2 billion.
Ahead of expansion for PC and console platform services, which will come under full swing next year, we are in the process of gearing up for domestic servicing of globally acclaimed game titles, working in collaboration with global partners in Q4. PoE 2, which is slated for early access release on the seventh of next month, has received raving reviews on its demo version showcased during the gamescom event, cementing its top-tier positioning in the hack and slash segment. The game offers more than unique hack and slash action, adding to it more extravagant action and maximizing the enjoyment of game control. With the anticipation building up around the globe, domestic user interests are also spreading, and we are making thorough preparations to attract a diversified user segment, including casual gamers, to drive outperformance versus the preceding titles.
Development and polishing process for Chrono Odyssey and ArcheAge Chronicles have been kickstarted under the goal of running CBT next year. Up until the CBT, we will release more information and videos about the game on a periodic basis to gradually build upon the anticipation of the global market. In-game play videos of ArcheAge Chronicles were released during the Sony State of Play event in September, garnering a great level of interest from the console users, especially on the graphic and universe, and action element of the game. It was accompanied by a release of an interview video with the developer, giving a peek into the story and content inherited from the original title, which further stirred up excitement.
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For mobile games, while in-house developed games like Odin and ArcheAge War generated steady performance, performance metrics of third-party titles that we publish trended down, driving mobile revenue down 31% year-on-year and 6% Q-over-Q to KRW 126.6 billion. Odin, in the domestic market, saw its metrics trend up across all user segments on persisting impact from the three-year anniversary update made at end of June. We have a well-diversified user base and solid performance metrics, which is the key strength of Odin, that enables the game to sustain its top-line momentum over a longer-term horizon. In the fourth quarter, to expand the user base who enjoy the content, we are going through revamping to configure content that's bespoke for each user segment, and we will adjust balance across classes to deliver a well-balanced play experience.
We expect this will help us maintain the performance at Q3 levels. Following new service being opened in August and extensive update of ArcheAge War, domestic service saw a rebound in performance metrics. By delivering a combative background that reinforces the fundamental joy of PVP rivalry, and by supporting in-game convenience features reflecting user feedback, we will be able to sustain the metrics and sales revenue at a steady state. For global servicing, our focus is on stable operations while swiftly carrying out update of core contents like Siege Warfare and server migration, which all work towards providing a comfortable gaming environment for our user base.
Most recently, competition among users has been heightened with metrics trending upwards. We are actively incorporating feedback that we gained from user forums and are focused on driving performance underpinned by our hardcore user base. Other revenue saw 7% year-over-year growth following the launch of a new product from the screen golf business, but d ue to off-season impact from golf course operations during the summertime, other revenue was down 2% Q-over-Q, reporting KRW 33.1 billion.
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Next is operating expense. Q3 consolidated operating expense was down 5% year-over-year, but up 1% Q-over-Q to KRW 188.2 billion. In terms of the breakdown, there were levers that drove labor cost up, like increase in the game lineup and headcount investment made for expanding into PC and console segment. Su pported by discipline on new hires and reallocation of roles and other efficiency gain efforts, labor cost was up 6% year-over-year and 3% Q-over-Q to KRW 45.3 billion. In the process of dealing with our non-core businesses and projects, we are continuously working on optimizing the company-wide labor cost structure, including subsidiaries, with the goal of maintaining labor cost at the third quarter level throughout the fourth quarter. Marketing spend increased 32% year-on-year and 48% Q-over-Q, reporting KRW 15.2 billion on the back of global expansion of mobile games and holding of PUBG PC game event.
In the fourth quarter, strategic marketing campaigns for PoE 2 and upcoming new titles are planned. However, we will continue to focus on highly efficient marketing for legacy games, aiming to maintain the marketing- to- revenue ratio at the level of last year. Commission expense includes fees to marketplace and studios and usage fees for infrastructure, and with fluctuations in game revenue, it was down 12% year-on-year and 2% Q-on-Q to KRW 88.6 billion. Amortization expense decreased to KRW 13.7 billion, down 30% year-on-year and 3% Q-over-Q due to the reduction in intangible assets. Other expense comprising of cost of sales of Kakao VX and other SG&A was up 9% year-over-year following new product release last quarter, but due to reductions in SG&A, it decreased 11% Q-over-Q to KRW 25.4 billion.
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In Q3, Kakao Games was running its business under an emergency management, implementing measures to drive rebound in performance and improve financial position through securitization of assets and sale and withdrawal from non-core businesses. In the short run, tangible results may be limited, but we are focused on revamping business structure and performance leverage so that we can harness performance from upcoming AAA titles, using it as an opportunity to make a quantum jump come second half of next year. We are at a juncture going from mobile-centric business to global PC and console platform expansion, w hile we will focus our company-wide capacity around strengthening fundamental competitiveness. Thank you once again to shareholders and analysts for your continued interest and support. This ends the third quarter 2024 earnings report.
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Now, Q&A session will begin. Please press star one, t hat is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, t hat is star and two on your phone. In order to allow as many Q&A chances as possible within a restricted time, we would appreciate only two questions per each participant.
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The first question will be presented by Hees eok Lim from Mirae Asset Securities. Please go ahead with your question.
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Thank you. I have two questions. The first question is, I would like to gain some understanding as to the overall strategic direction that you have regarding the rationalization of the company's headcount, and when will we start to see the impact from such effort? The second question is, I see that you have quite a bit of lineup of new titles that are upcoming. Out of those, can you provide us with some color on maybe one or two titles that the company is looking forward to?
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Hi. This is Michael. I will respond to your first question with regards to the rationalization efforts that is ongoing within the company vis-a-vis the non-core business areas. As our CFO has mentioned at the very beginning, we have sold off certain stakes that we were holding in Sena Technologies. For Kakao VX, there were headcount- related rationalization that was ongoing with regards to reallocation of the human resources as well as taking early retirement program. So, all of these efforts are being focused so that we could focus our efforts as well as our resources into the future growth of businesses. With regards to some of the keywords that I can maybe elaborate that will help us further fuel future growth, n umber one, we will be focusing on maximizing the performance from our global business.
Number two, expand PC and console platform. Number three, diversify the game genre and the segment that we play in. Number four, using AI technology in developing and servicing the game titles. And number five, upscaling the processes so that we can improve on customer engagement. So, these five areas are some of the key strategic directions for the company. Out of these efforts, basically the global performance, expanding into PC and console platform, as well as the diversification of the game segment, t hese three strategies would start to feed in and you will be able to see its impact on these new game titles that would be introduced starting next year.
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Also responding to your second question on which of the game titles that are upcoming next year that we are really looking forward to, I have to say that we have quite a bit of new titles that's upcoming next year, and we are looking forward to all of those game titles that will be released. But I could respond to your question in two ways. The first one is with regards to strategies that I have mentioned, which is global expansion into platform and diversification of the game segment. There's going to be many different new titles that's coming up next year, and as we've done in the past, we will be quite aggressive in making that expansion forward.
The new titles will include some of the PC and console mid-core titles from Ocean Drive and there will be some other titles that will play as an important icon that could trigger future growth for us. So, w e are looking forward to a couple of new titles that are upcoming next year. You would also have interest as to what financial impact it will have. First, we've already mentioned that there's going to be two AAA titles for PC and console platform, mid-core that is, excuse me, t wo AAA titles that are upcoming for PC and console platform. We are looking forward to that. Also, secondly, Lionheart is developing a mobile MMO game title. It's called Project Q at this point, and that title is slated for release in the second half of 2025.
So, we believe that these two game titles will have quite a bit of significant contribution made to our financials.
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This is CFO Terry. I would just like to also add on top of what Michael has mentioned, as we are preparing for our four game titles that are upcoming, f rom a financial perspective, there will be focused investment into development and also use of the company resources. So, inevitably there's going to be increases in the expense and investment that we've made. However, this was already catered for in our initial year budget planning. There's going to be some offset impact on the companies and the subsidiaries, headcount- related rationalization process, and from that, we will be saving costs, but that will be offsetted with the investment and the spending will be required. So, there is plus- minus balance that we are very keen on striking. In terms of the cost items like labor cost and outsourcing and partnership- related expenses, it will be maintained at the current level.
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Next question.
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The following question will be presented by Seungh oon Lee from IBK Investment Securities. Please go ahead with your question.
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Thank you for taking my question. Next year, we are looking forward to a couple of big AAA titles upcoming in the genre of MMORPG and RPG. But in the Western markets, MMORPG games do not seem to succeed that well. What do you think is going to be the levers that will help you bring the release into a success? And second question is you're going to be publishing and releasing multiple game titles, but recently, we've seen that the probability of success has been eroded. I would like to gain your insight as to how you assess the situation.
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Responding to your first question now, I presume that you are mostly referring to the upcoming game titles of Chrono Odyssey and ArcheAge Chronicles, and I think that those types of concerns are formed from limited information about the new titles that are under development. You are right that both titles were initially introduced as an MMORPG with the distinction of implementing action combat on MMO servers. Both titles are developed, however, with the goal of reaching commercial success in the so-called growth RPG market, which is becoming a major genre in the global marketplace with the broadest audience in the Western world. So, the characteristics of MMORPG games, which is defined by RVRs and PVPs and warfield battle and combat, it is quite different from what you see in growth RPG. To this end, the large- scale battles such as sieges and PVP elements have been drastically removed.
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Both of these studios, XLGAMES and Chrono Studio, they have solid experience in developing online RPGs, and they have been around since the early days of Korea's PC gaming industry. The game is centered on single-player content that allows players to experience the fun of combining various skills and combat actions based on a cohesive and immersive world setting. The game is being completed as a growth RPG, which is a mainstream game segment in the Western world that allows players to enjoy the fun of exploring new domains and adventuring through the freedom of play provided by the large open world, and the puzzles and strategic combat elements that are scattered throughout the game.
They also offer a wealth of free-to-play non-combative content based on their long experience in running live services, and also offer a wide range of collaborative missions and PVP competitive content that can be enjoyed by parties or guilds, as well as social play, such as party type dungeons and boss monster encounters that require strategic collaboration and team play. Korean game studios are well-known for their competitive edge when it comes to social play and live servicing. So, u tilizing such core experiences and capabilities gained in the Korean game market, we are striving to compete with the Western market, which are formed and centered on single-player games, by adding and bringing in additional funds and differentiation.
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Responding to your second question, that, I have to say, is a quite difficult question to tackle because it's a challenge that is faced by all of the game companies within Korea. However, just to provide you with our perspective, Kakao Games is really good at successfully servicing live serviced games. We have the knowhow, and also, we have the experience of building out and solidifying the basis of a specific game genre. As you've seen from our past successes, especially in MMORPG game titles, which also include Odin, we've been able to prove that we have the capability. All of this, of course, supported by the financial stability of the company. With the upcoming RPG titles as well as the legacy game titles that we have in MMORPG, including Project Q that is upcoming next year, we are going to be tapping into and expanding into the global market.
This is a competitive lever that we have as a game company. The fact that we have extensive experience in providing a successful live servicing of the game titles is something that we are known for. So, we will continue to harness that capability, and on top of which, i n order for us to achieve global success, there are multiple levers that will have to work towards this. First is that we need to be able to build an extensive amount of experience. Experience counts in this business. Recently, we've seen some Chinese game titles becoming quite a success, but what they've been doing was that over a longer period of time, behind the scenes, they've been really focusing on overseas servicing of the game titles that they've developed.
For us, in the existing game segment, where the market is somewhat saturated, we are now faced with a mission to be able to explore into a future game genre. In that aspect, that building up of experience is quite important. The second is also that what we need to do is learn quickly and establish our footing in the market and be able to apply our capabilities into developing new games. This also hinges on our internal process. We are focused on increasing the engagement level of our users, and it has to do with efficiently running the process internally, identifying the needs that our gamer base has, and responding very quickly. All of this boils down to strengthening the basics of our business.
I think that is where the secret to success lies, and we will continuously, of course, make investment into content and really focus our resources that will help us attain our goal.
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Next question, please.
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The following question will be presented by Jingu Kim from KIWOOM Securities. Please go ahead with your question.
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Thank you. We'd like to get an update on the release schedule of Chrono Odyssey and ArcheAge Chronicles for next year. And what are the business models for these games?
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Regarding the Chrono Odyssey, our goal basically is to go into CBT, closed beta test, by Q1 of next year, 2025. Right now, we're in the process of preparing for the testing. And depending on, of course, the result of that first round of CBT, we will decide whether we will go into the second round of CBT. Basically, our goal is to go into official release in the second half of the year. For ArcheAge Chronicles, the CBT is, at this point, we're looking to run it in Q3, that's earliest Q3 of next year or second half of the year. Of course, we would have to wait and see what the outcome of that first round of CBT is, after which we will be able to fix the date.
But at this point, our goal is for a release in the first half of 2026 or in the summertime of 2026.
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In terms of the business model, the main target is, as I've mentioned before, it's the growth type, it's active RPG game genre. So, it will take on the form of sales as a package. Also, we will most likely completely get rid of the pay-to-win element and adopt a more monetization strategy that is in line with a global standard. These two companies or studios, as I've mentioned, have a very long history of supporting live servicing of game titles, so r ather than just a sale of a single package and having just a one-off sale of the game package, we will leverage off of their live servicing capabilities, which will provide a basis for a stream of revenue as we offer interesting content to the players.
All the specifics will be able to come back to you after the CBT is complete, and we will share with you more details when that time comes.
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The following question will be presented by Seungh o Choi from Sangsangin Securities. Please go ahead with your question.
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Thank you. I am Choi, Seungh o from Sangsangin Securities. I just have one question. Recently, we've seen heightened competition amongst your peers, so it would have been quite difficult for you to effectively source games for publishing purposes. What is your edge in publishing games? Also, because there is a higher level of competition, you may also need to make some equity investment into studios. What is your approach on that?
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If I understood your question correctly, you are asking about our sourcing competitiveness. As you know, Kakao Games, since the establishment of the company, has been very closely working with our partners and have been effectively sourcing game titles, which translated into good business results. If you look at some of the small to mid-size game studios in a specific genre, such as the subculture games and PVE, or collective PVE games and growth RPG games, there are companies that have good competitiveness in terms of servicing and developing those games. We also have a very good reputation vis-a-vis these partners, because we have long years of collaborating and working together with the game studios. I can tell you that in certain game genres, we are, Kakao Games as a company, is at the leading edge.
So, there are cases where these studios will come to us first for possible collaboration and cooperation. Having said that, the overall macro environment is to our disadvantage. The market itself is quite significantly depressed at this point in time. The studios' capabilities, the smaller scale ones that is, for their capabilities to develop a game title that is up to a certain level, has been significantly challenged because of the overall macro environment. But that doesn't mean that we, as a game company, can compromise the standards that we have with regards to the level of completeness of the game title. We must source games that really meet and satisfy the requirements and the expectations of the users, in terms of the content and the systems that we provide. With regards to strategic keywords that I had previously shared, we are actively looking for opportunities.
And also, if need be, we are willing to also make equity investment as well. Over the past three years, there were many partners that we've worked together with. Some of them are part of our consolidated statement, and in some studios, we've just made minor investment. It is quite fortunate, from our perspective, that we have a very solid sourcing structure by collaborating and working together with these partners and studios for us to source various different types of high-quality games.
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The following question will be presented by Jaemin Ahn from NH Securities. Please go ahead with your question.
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Thank you. I am Ahn, Jaemin from NH Securities. Just one question on Sena Technologies. I understand that the wholesale of business was completed in Q3, and this should have been fully captured under P&L from discontinued business. Doesn't seem to be the case. So, would there be some adjustments made to the quarterly report?
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It's regarding Sena Technologies and it being captured under P&L from discontinued operation. As of end of September, we have actually sold off our stake as well as transferred our control of that entity, and they have been excluded from the consolidated numbers as of Q3, for the Q3 of this year. It is captured under P&L of discontinued business. Maybe my explanation previously was not clear enough, so o nce again, I can tell you that from the consolidated operating profit and consolidated revenue, the Q3 numbers as well as the cumulative numbers from Sena Technologies is non-inclusive. Basically, also, for comparative purposes, the numbers that you see for previous years, Q3 and cumulative basis, revenue and operating profit also excludes Sena Technologies. They are currently reflected under a separate line item under P&L from discontinued business.
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Since there are no more questions in the queue, I would like to now close the third quarter 2024 earnings presentation by Kakao Games. Thank you very much for joining us this morning.