Good morning. I am Lily from Kakao Games IR division. We would like to now begin the second quarter of 2024 earnings presentation. Today, I am joined by CEO of Kakao Games, Michael Han, and CFO, Terry. We will start with our CFO's presentation on Q2 earnings. Before we begin, as a disclaimer, please note that today's earnings release includes estimates of KIFRS-based consolidated statements, which are subject to change upon the auditor's review.
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Good morning. This is Terry, CFO of Kakao Games. Let's begin with the financial performance for the second quarter of 2024. Kakao Games Q2 consolidated revenue was down 13% year-on-year and 4% quarter-on-quarter, reaching KRW 235.6 billion on the back of less than expected results from new game titles. While second quarter consolidated operating profit declined 89% year-on-year and 77% quarter-on-quarter to KRW 2.8 billion, due to sluggish performances from new titles, on top of continuing loss from Kakao VX. In terms of the Q2 revenue breakdown, PC game revenue increased 37% year-on-year and 5% Q-on-Q to KRW 16.3 billion . Continuing impact from PUBG's major collaboration updates powered traffic uptrend and stable growth, and we are also gearing up for PC console global servicing expansion and realigning our service lineup.
Ocean Drive Studio, our subsidiary, is currently developing three premium indie game titles for the PC console platform and will showcase the game during the upcoming August Gamescom event. Global user feedback is being collected and used actively to improve the level of completeness for the game itself, and we believe it will work as a cornerstone for our global expansion, underpinned by diversity of the game genre. Starting year 2025, we will be releasing Chrono Odyssey and ArcheAge 2 in sequence, which are games that stay true to traditional story-based quests of MMORPG games, but adds on top of it a flavor of single RPG games, open world-based non-linear growth route, and high quality combative action of action RPG, attempting to cross over the boundaries of one specific genre.
Thus, we look forward to building upon a strong appeal of a well-made MMORPG to better reach out to Western gamers, leveraging this competitive and differentiated edge. Also, we are seeing growing interest and anticipation building on the hack- and- slash game genre, and we think Path of Exile 2, that is, release into the domestic market with its proven gameplay will be possible sometime during the fourth quarter. Path of Exile 2 will have much enhanced game convenience and action elements compared to the preceding title, and by bringing greater success over and above the success of the preceding one, we will make sure to build a service reference for this major global genre.
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In mobile games, revenue dipped 22% year-on-year and 17% quarter-on-quarter reporting KRW 134.5 billion . Rather than pushing out revenue efficiency of major titles, our focus was on content updates with the focus on solidifying retention of our high loyal users. Odin went through an update with a focus on optimization and user convenience, which drove revenue down versus last quarter. But with the third year anniversary update, the title once again landed on the top grossing gains list. What I can tell you with confidence is that although it has been three years since the release, Odin still shows highest traffic level in the same genre, solving issues that may undermine the gain revenue. Its record and achievements amid multiple competing title releases proves as such.
In the second half as well, we will fully consider different elements such as in-game goods, spending trends, size and scheduling of content updates, and competitive landscape to strike a good balance between stable traffic and revenue efficiency. ArcheAge WAR broadened its gamer base, enjoying the PvP content, igniting gamers' desire for growth and competition across the entire user spectrum, while through the update on Realm Siege Warfare, cohesion amongst alliances has been strengthened as we continue to provide stable servicing based on the very ethos of MMORPGs which are competition and growth. Through content updates, we plan to sustain and solidify core user traffic while by releasing new class jobs and running major scale updates, we will continue to provide new fun factors to our gamers.
For ROM, which was released at the end of February, while maintaining rivalry dynamics between nations, we have actively received user feedback and made periodic briefings and engaged in interactive communications, taking a longer-term horizon approach in configuring a well-knit global services. In the second half, we are planning on adding new servers and lowering the growth hurdle so as to better accommodate new and returning users. We will go through a large update on PvP content, including the siege warfare. To update you on the release of ArcheAge WAR in Taiwan, Japan, and key Asian countries last June. Although global servicing fell short of our initial expectations, we sustained solid traffic thanks to efficient marketing, which we employed from the pre-order stage, focusing on hardcore user acquisition.
In the second half, we will be expeditious in the rollout of our PvP content that builds on the strength of large-scale PvP, which is unique to ArcheAge WAR, in order to build up a foundation for longer-term servicing. Also, by building on global live servicing experience for subculture and idle RPG games, we are now equipped with capacity to enhance servicing level for our upcoming titles, supported by genre-specific expertise across greater organization. Starting the second half, we will gear up for gains from various different genres, including hack and slash, roguelike casual, subculture action RPG, and this will help us drive good results from the global market. For the other revenue, total revenue increased 22% Q-over-Q, a new product launch from Kakao VX and high seasonality effect, but a negative growth of the screen golf equipment revenue dipped 3% year-over-year, coming in at KRW 84.8 billion .
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Next is on operating expense. Consolidated operating expense for Q2 was down 5% on year and 1% on quarter, reporting KRW 232.8 billion . In terms of the breakdown, labor costs saw some upward pressures on new title development, but through our efforts around productivity improvement and headcount reallocation, it declined 3% Y-o-Y and 5% Q-o-Q to KRW 52 billion . Other than for new title development purposes, we will control hiring in the second half, and as our HR efficiency plan is ongoing as planned, we expect labor costs to be kept around the previous level. By adjusting for spending in accordance with new game title performances, marketing spend was down 41% year-over-year and up 8% Q-over-Q, reporting KRW 12.2 billion.
Marketing costs may inch up slightly in the second half of the year following pre-marketing plans, which includes making promotional videos for major triple A new titles, but it will still be controlled at around 6% of revenue this year as well. Commissions expense includes fees to marketplace and studios and for the use of infrastructure. With the fluctuation in the game revenue, total commissions was KRW 94.2 billion, which is up 2% year-over-year and down 8% Q-on-Q.
In July, we expect higher commissions paid to studio due to good sales performance that we are seeing for major PUBG collaboration products. But we expect that increase can be offset by broader impact from efficiency gains on infrastructure spending starting from the third quarter. Depreciation and amortization was down 24% year-on-year due to the impairment review on intangibles undertaken end of last year and with amortization and intangible assets relating to technologies used on new products of VX, there was 1% increase Q-over-Q, reporting KRW 16.3 billion in total amortization. Other expense comprising of cost of sales of Kakao VX and Sena Technologies increased 2% year-over-year and 18% Q-on-Q reporting KRW 58.1 billion on the back of new product release and high seasonality, which drove other revenues.
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To ensure a stable financial position of the company and to gain capacity to sustain our investment, we decided to issue exchangeable bonds. We will continue on with investment into projects with higher future growth prospects and global performance expansion by closely monitoring both internal and external market backdrop. Also, from early this year, we have been reviewing non-core businesses and projects under the approach of having a selective focus. We are closely studying and running simulations on businesses that will now provide us with an opportunity to grow in the future, or help us in terms of building core competencies, even for businesses that we may have considered as main businesses in the past. Although it is a difficult task, we will start implementing in sequence starting in the third quarter and carry out the plan placing foremost priority on enhancing the corporate value.
In the process, there may be many difficulties and issues, but we will swiftly carry out an update on our business and organizational efficiency in line with social and investor expectations, and drive such change by bringing together the wisdom of everyone at Kakao Games. So that we may have unwavering focus on our future growth and on our global success. Thank you everyone, shareholders, investors for all your support and interest you have shown Kakao Games. With this, I will end the presentation for the second quarter earnings, and we will be happy to now receive your questions.
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Now Q&A session will begin. Please press star one that 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, 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.
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The first question will be provided by Jin-Gu Kim from KIWOOM Securities. Please go ahead with your question.
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Thank you for taking my question. I would like to get some explanation about the company's marketing plan regarding, for instance, triple A titles that are upcoming. Do you have any plans to set a booth at the Gamescom and participate in the Gamescom event? Any other game shows?
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Hello, this is Michael Han, the CEO. I'll respond to your question about our upcoming plans in regards to the Gamescom and other games related exhibitions and events. We actually did receive a request for a booth setup at the Gamescom in 2024, but we think that at this point, what's more important for us is to focus more on enhancing the visibility regarding commercialization by focusing more on upgrading the content quality, focusing on development resources, and also to quickly carry out the closed beta service. We decided not to set up our booth at the Gamescom for this year's event.
Now, if you look at Chrono Odyssey, if I provide you with a bit more color on specific game titles, our plan is to carry out and run a CBT within the first quarter of next year and actually showcase a demonstration version on the August Gamescom event. We will closely look at the outcome of the CBT test and also focus our efforts. We will see how the market anticipation is building. After considering for all of those different elements, we will most likely be able to release it in the second half of 2025.
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Regarding ArcheAge 2, we're preparing against an objective of actually allowing our global user base to experience the gameplay for the first time in next year's summer Gamescom event. After we showcase the game, we think that we will be able to run a CBT test in the second half of next year. That basically is the objective under which we are working.
Depending on the result of the second half CBT test, we are a bit more flexible on the actual or the official timing of the launch of the game. So earliest it may come out in the end of 2025 or in the beginning of 2026. Our objective is to simultaneously launch these two game titles via the PC and the console platform. And we think that we will be able to have an opportunity in the second half of this year to share with you more detailed information for each of the platforms regarding the launch of their respective titles and more specifics on the marketing plan.
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Next question, please.
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The next question will be presented by Seung-h oon Lee from IBK Investment & Securities. Please go ahead with your question.
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I have two questions. The first one has to do with your PC and console games. I would like to understand more about your cooperation with overseas and global publishers and what your overall plan is regarding global servicing going forward. Also if you look at second half of the year and upcoming new titles, most of these games are PC and console games, and it seems your mobile game performance has been quite sluggish up to date. So we would like to get some information about what your take is on the overall game market and particularly for the mobile game segment.
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Now, on your first question, we clearly recognize that the influence of global platforms are quite significant. Of course, for the mobile game segment, but also in PCs and consoles as well. That is why we are engaging in various different cooperative models with these global publishers. We are seeking out additional cooperation opportunities, and as we speak, we are constantly in discussion with these publishers in terms of, for instance, using AI and technology, as well as cooperating on the marketing side as well. In the case of a business cooperation model, we basically also are engaging in discussions focusing more on titles that have very high prospects of becoming a triple A IP.
In terms of our own game titles like ArcheAge 2 and The Swordmaster's Youngest Son, we are receiving quite positive feedback in terms of the level of awareness for the IP itself and the gameplay completeness. The global platform companies have provided us with certain proposals and have shown us quite a bit of interest. We are very actively talking about potential ways for us to collaborate and cooperate in terms of distribution and servicing of these game titles. Having said that, we do not have the details yet to be able to share with you the specifics, but I can tell you for certain that we are very actively engaging with these global platform companies, and we are clearly mindful and we acknowledge that there is quite a bit of synergy that we can derive from the cooperation.
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Now the second question you posed is quite broad question, so it may be quite complex in giving you a very simple answer to this, but I will try and try to give you a more succinct version of what I think are the key. I am looking at this from three different strategic perspective. The first one is on the mobile market. Mobile game segment is where we, Kakao Games, have competitive advantage on. I can share with you the present and the future of this mobile MMORPG segment.
Second is in the mobile games market, aside from the MMORPGs, what we are doing and what we are preparing and the things that we are attempting in terms of wanting to expand on the mobile segment other than the MMORPG games. The third is the PC and console game segment, and this is a question that I receive quite often. A lot of people ask me that whether there is a certain limitation that MMO genre itself intrinsically has. I can share with you what my view is with regards to that very question.
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First, we still see that there exists, not just for the domestic market, but also if you look at the greater Asian market, there still exists a demand for mobile MMO game titles. Now, despite the fact that there has been a similar game genre that had released similar games, because of that, we think that the overall traffic, the entire pie, has been divvied up across these different games, and that had an impact of lowering the overall volume from these games. But as can be seen from the success that we had from Odin, despite the fact that there were multiple other rivalry titles that were launched into the market, Odin and ArcheAge WAR still command a very solid traffic trend. I think that is because of the fact that these are titles that stay true to the ethos of what MMORPG games are all about.
On top of which, there are new fun factors that have been added as well as new ecosystem that has been created. I think that is the key that forms the basis for the continuing demand for these types of game titles. For the games that we are currently live servicing at this point, as well as for the upcoming new titles that we are preparing, all of this preparation is done in clear recognition of this direction that I have just mentioned. I believe that this will form a good basis for a steady revenue going forward.
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For the mobile games on the non-MMO side, there are two main genre that we will focus on as we go forward. One, where we have quite a bit of competitive edge for the domestic and the global market, is the subculture segment. We are known for and having servicing quite steadily the subculture game titles, and we have generated good performance from the subculture games. So we consider subculture as one of our core game genre that we will focus on.
We are in the process of preparing and coming up with high quality game titles that are competitive and also sourcing for such games. Together with our subsidiary studios as well as the studios that we have invested or we have cooperated with, we are coming up with a new game title. We have a new game title in the pipeline. Just like you have seen from Guardian Tales, we have done a successful staged global launching, and the performances and the action-adventure game genre that we have gained from Guardian Tales has been quite good.
Adding on top of that, with games like Goddess Order as well, we will be growing this segment, this game genre, as another important pillar of our business. We will leverage our capabilities in further boosting this game genre and the game titles within that genre. In terms of other genre that we are interested in currently, next year, there is a strategic simulation game title that is upcoming. We will also be focused on expanding different genre and portfolio that includes very unique gameplay and also the unique universe of the games. All of these preparations are ongoing as we speak.
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In terms of the PC and console games, we are focusing on developing mid-core games and also premium indie game titles as well. Ocean Drive Studio for the past three years has been developing a mid-core game title, and we will be showcasing three of such mid-core game titles in the upcoming Gamescom. Also these are game titles that incorporate top view and zombie survivor games.
These different game titles are upcoming in the future. For Lionheart Studio, they are developing a looter shooter game title from XL, and also the action RPG for The Swordmaster's Youngest Son, basically is also part of that as well. XLGAMES also is focusing on developing two different types of mid-core games and also for the console game platform as well. We are in the process of expanding to various different game genres. We believe that will underpin the growth going forward. We will first focus on our own in-house game development and also expand the partnership with the external game studios as well.
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Next question, please.
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The next question will be presented by Hee-s eok Lim from Mirae Asset Securities. Please go ahead with your question.
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Thank you for taking my question. You mentioned that you will be releasing Path of Exile 2 in the fourth quarter. Compared to Path of Exile 1, what is the expectation that the company has for the performance that Path of Exile 2 will bring to you? Second question is, using AI technology on game development, what impact will this have on your efficient cost management?
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On Path of Exile 2, basically there has been a lack of new titles in the so-called hack- and- slash game genre. The market incumbent, which used to be Diablo, also fell short of satisfying the needs of the gamers and the market. If you look at our Path of Exile 1, based on the new season updates, we were able to record concurrent user base, highest peak that is, and we are seeing a continuous build-up of anticipation of our user base on the upcoming Path of Exile 2. Compared to Path of Exile 1, there is much stronger action element and also based on high quality visuals, we are able to provide more riveting and colorful, combative action, and we believe that this will be able to give an opportunity for Path of Exile to have an unrivaled positioning in the hack and slash segment.
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What we did was we further enhanced the freedom level, depending on the preferences that the users have. There has been a variety of new ways that the gamers can use to nurture and grow their characters. Also we have strengthened on the co-op element through the party plays as well as different cooperation and collaborations amongst the gamers, which have received quite good feedback from the user base. We have also made some improvements on the convenience system as well.
At this point, the company has a very high expectations for this game title, and we think that this would be able to expand on the user base that we have enjoyed to date. Also compared to Path of Exile, Path of Exile 2 is going to be able to expand more into the hack and slash user base. We will be able to share with you more information as we go forward and as we implement some marketing plans before the official launch of the Path of Exile 2.
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On your question on the use of AI technology, we will be using AI tech on the development side as well as on the servicing side as well. We think that it will have impact on the development of the game titles and on enhancing productivity. We are clearly aware that generative AI does accompany efficiency improvements, effectiveness, more diversity and productivity. That is why our development team is also using AI from the very concept stage of game making. I think the most extreme productivity gain can be achieved from the 3D conversion. By using these AI powered tools, we will be able to facilitate 3D conversion, and also that will be used in generating the resources that would be used within the game. Of course, there is an IP issue which we will have to deal with on a separate basis.
I believe that the extreme amount of productivity, once again, is going to be driven by 3D conversion, by using the AI powered tools that is available in the market. We will very actively use these tools and solutions which will help us, especially for developing triple A titles, significant reduction in the number of resources, personnel resources, that is, that we need for developing the game. AI technology is not just important for the sake of cutting costs.
We think that AI technology is going to give us an opportunity to create a new creative that is going to really transform the game play and the characteristics of the game itself. For example, in the past, the level of freedom within the game could only be restricted because of the limitations and the amount of game resources that could be used. AI technology will be able to lift that restriction, and I believe that that is going to really innovate the playing patterns, the game play patterns that we see when the gamers engage with games.
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Regarding the second part of the question, we at Kakao Games will use these AI strategies and technologies and incorporate that in the global servicing. We think in that area, AI is essential because if you look at the global market, they have different language, different cultural background, and consumption behavior. We therefore need to be able to customize our marketing approach vis-a-vis these user base.
Depending on the user preference, which we will be able to run analytics based upon machine learning and extracts important and more relevant keywords for the audience that we are targeting. We will use it to very quickly develop and come up with various different videos and marketing collaterals, and we will be able to provide more customized marketing catering to the preferences and the needs of different user base. This is not just for the purpose of reducing costs, but it is more so about maximizing the impact of such marketing activities.
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Next question please
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The next question will be presented by Chung Il Kim from Morgan Stanley. Please go ahead with your question.
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Thank you. Can you give us a breakdown of your other revenue? Break that down into your wireless or mobile versus golf. The second question is your plan to sell non-core businesses. I see that the speed at which this is taking place at the Kakao company, the overall company-wide speed seems to be quite slow. Can we expect to see the sell of the non-core businesses starting with the third quarter?
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Hello, this is Terry, the CFO. Giving you the breakdown of revenue, but just to remind you that we have yet to receive an independent auditor's audit on these numbers. On that basis, I can tell you that the VX revenue for second quarter was KRW 36 billion. The rest is Sena Technologies, which is KRW 48.8 billion. VX revenue has been inching up on a Q-over-Q basis, and we are expecting a slight increase in the third quarter as well. This does not mean that we are expecting a significant rebound going forward. We will continuously review the key or the core business focus going forward as well. Regarding the second question, I mentioned during my presentation that we will start to conduct a review on our non-core businesses and projects starting the third quarter.
That does not necessarily mean immediately that we are going to be selling those non-core businesses. Selling those businesses is just one of the options. The other approach could be we could reduce or minimize the scope of the businesses we engage in on the non-core side. We will be making the decisions as soon as probable, and once we have more details, we will be able to communicate to you through disclosures.
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Currently there are no participants with questions. Please press star one, star and one to give your question.
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Thank you very much. This ends the second quarter 2024 earnings presentation of Kakao Games. Thank you everyone for joining us this morning.