Good morning and good evening. Thank you all for joining the conference call for the earnings results of Kakao Games . Now, we will begin the presentation on Kakao Games' first quarter earnings results of the fiscal year 2024.
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Good morning. I'm Lily from Kakao Games IR team. Let's begin the first quarter 2024 earnings presentation. With me today are CEO Michael and CFO Terry. We will first begin with Terry's presentation on Q1 earnings for 2024. As a disclaimer, today's earnings release includes estimates based on KIFRS consolidated statements, which are subject to change upon the auditor's review.
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Good morning. I'm Terry, CFO of Kakao Games. I will start with an update on the first quarter financial results for 2024. Consolidated revenue for Kakao Games in the first quarter was down 1% YoY, but up 3% QoQ, reporting KRW 246.3 billion, while Q1 consolidated operating profit was impacted by increase in losses from Kakao VX, increasing 8% year-over-year, but down 13% QoQ to KRW 12.3 billion. Now, looking at the revenue breakdown for the first quarter, PC game revenue was up 10% year-over-year and 19% QoQ, reporting KRW 15.6 billion. Higher traffic from new map updates at the end of last year for PUBG has also translated into robust sales of new skin, which was rolled out at the start of the year. Whilst for ArcheAge there was increase in traffic following the 11th year anniversary event on top of opening of new domestic servers.
As part of our mid to longer term investment, our priority is to create an ecosystem based on selective and strategic investment, fully considering for different stages of partnership to gain growth momentum in the PC and the console game market. For the domestic PC and console market, we will be selective and invest into game studios who can operate and service massive MMORPG games, which is a domain that has been already proven and ones with clear focus and distinctness across mid-core and indie genre in the global market. We are making necessary preparations to carry out staged investment into PC and console game studios, once we are able to build core business infrastructure, and once we build up live global servicing experience. Preparation is also well underway for early access release of a hack and slash game, "Path of Exile 2," with the opening up of its official website. We have also been maintaining strategic partnerships with Frost Giant, who is a global studio specializing in RTS games, and have kickstarted discussions to collaborate on the new title, "Stormgate." Last March, we executed a global servicing agreement with the developers of "Chrono Odyssey," and based on the common understanding that we share, we are discussing best ways in which to tap the global market.
We will continue to drive volume growth through platform expansion, with "Chrono Odyssey" signaling the beginning of this journey. We are making good preparations, engaging in close discussions with our global partners, to create awareness of Kakao Games as a brand in the minds of global players.
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For mobile games underpinned by stable performance of "Odin," its biggest and solid player base, and the release of global title, "ROM," mobile revenue grew 5% year-over-year and 3% QoQ, recording KRW 161.3 billion. "Odin" has provided opportunities for all its user segments to grow their characters as we carried out content renewals and added new equipment, which drove up player satisfaction. With the launch of upper tier class, we were able to reignite the desire to compete for the core user group. As a result, we saw highest domestic traffic in the first quarter, and we were able to maintain a highest rank on the list of top grossing titles. In the second quarter, we will work to further drive user satisfaction through a 30-year anniversary event based on user enhancements that we've made so far and the growth that we've achieved. In Taiwan, metrics are stable as we quickly carried out updates, catering to users' preference and running events that works well with the local taste.
In Japan, players' understanding of this game and the genre is deepening as displayed through improving metrics and stabilization of services. "ArcheAge WAR" has diversified the play mechanics by changing the dynamics of PVP competition and combat through the rollout of new classes. With extensive server updates, even after the first year anniversary of servicing, we are maintaining steady and stable services. In Q2, we are planning on large scale updates such as Realm Siege Warfare, which will double the fun of battle amongst the core user segments and largest scale PVP content, as well as team warfare, offering entertainment of competing to mass number of users. As you can see, we expect "ArcheAge WAR" to set itself up as a top-notch PVP game with an ever stronger positioning.
We will also build a foundation for long-term servicing through ongoing balance patch rollouts and growth system updates. We also showcase the game's direction forward and its content in Taiwan, Japan, and Southeast Asia, heightening the level of anticipation. Based on one year of experience in Korea, we expect to generate good results through localization and balance adjustments to better meet the expectation of global users and improve quality and stability, which will be our foremost priority.
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Since its launch in February, ROM has focused on server stability and optimization in order to support massive inflow of global traffic. As a result, it achieved solid initial results with forming of a fierce cross-border competition in regions such as Korea and Taiwan. During the two-month servicing period, the share of overseas users increased steadily on the back of an optimized business model that better reflects balance between nations, providing the long-term viability of mobile MMORPG services in the global market. Kakao Games will configure its portfolio to provide users with greater choice by differentiating target users and content among its MMO lineup, and will provide services that prioritize gaining a solid user base so that we may sustain a long-term stable revenue stream. Next is on other revenues. On the back of demand rebound in Europe, Sena Technologies revenue was up year-over-year, but on continued slump in the screen golf business of Kakao VX, other revenue was down 15% year-over-year and 1% QoQ, reporting KRW 69.4 billion.
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Q1 consolidated operating expense was down 2% year-over-year and up 4% Q-over-Q, reaching KRW 234 billion. Expense breakdown is as follows: labor cost was up 10% year-on-year and 4% QoQ to KRW 54.5 billion on the back of wage increase and hiring of developers, which are required for our platform expansion. Save for special circumstances like development of new titles, we will keep to the discipline of controlling new hires and keep the level close to 2023. On sustained MMO live marketing efficiencies, marketing spend was down 45% year-on-year, but up 10% QoQ, reporting KRW 11.2 billion. Marketing spend may fluctuate depending on the market situation of domestic and targeted overseas markets at the time of new game rollout. Anyhow, we will nevertheless control marketing expense within 6% of revenue, which is in line with 2023 levels, and focus on gaining marketing expertise for global expansion.
On the back of good performance coming from ROM, developed by our affiliate invested studio, commissions increased 11% year-on-year and 12% Q-over-Q, reaching KRW 103 billion, while depreciation decreased 24% year-on-year and 28% Q-over-Q to KRW 16.2 billion on the back of impairment of intangible assets at the end of last year. Other expense comprising of cost of sales from non-game businesses, including Kakao VX and Sena Technologies, fell 10% year-over-year, but increased 1% QoQ, reaching KRW 49.2 billion, a limited decline in fixed cost despite the fact Kakao VX is employing a focused strategy around driving cost efficiencies with a view towards achieving a turnaround in profit.
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Under the leadership of our new CEO, we've developed global launch strategy, expansion strategy for diversity, genre specific investment, and Mega IP development strategy for PC and the console platform. We are also developing concrete plans to implement these strategies effectively with speed. We also carried out corporate-wide reorganizations around key strategies and goals. We expect to further strengthen our capabilities around development and service alignment, user engagement, and global servicing capacity, and will place momentum behind such efforts going forward. Once again, thank you all, including our shareholders and investors for all your interest and support for the company. This ends the presentation on earnings for Q1 2024. We will be happy to take your questions.
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Now Q&A session will begin.
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The first question will be provided by Dong-hwan Oh from Samsung Securities. Please go ahead with your question.
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Thank you for taking my question. I have just one question. We've seen recently in the domestic mobile game market, the influence of the MMORPG segment has been dwindling and accordingly, the earnings that we see from companies with such MMO titles have been going down. There's a bit of a concern that a lot of the upcoming titles that you've shared are mostly in the MMO genre. We would like to know as to what your strategies are regarding non-MMO game titles.
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Hello, this is Michael, CEO. I would like to respond to your question, and I think it's worth mentioning the whole value of MMO genre as we see it. As you know, the players in Asia and Korea alike are very much familiarized with this MMORPG genre. That is because there were many development studios who were able to develop highly perfected MMO game titles by creating such high-quality content that actually contributed in improving people's preference, or increasing people's preference for these specific types of game titles. From a business perspective, it was, I believe, an appropriate business strategy and decision to actually play with such market opportunities as it presented itself. That was an approach that Kakao Games had taken in making investment into the MMORPG genre.
Now, having said that, most recently, we've seen increases in number of competing titles that are launched into the market, and there's been a built up of fatigue around MMORPG game titles, and there were, to a certain extent, cannibalization that took place in the market as well. I believe that it will be quite important for us to develop games that is specialized for each of the user segments. And if we are able to do a good live servicing of such games at the right intervals, maybe we will not be able to grow that type of game into a massive growth engine or be able to tap into the massive global market. But at least we will be able to operate and service this game based upon a very steady foundation of growth. Basically, that would be the threshold or the approach that we will keep to when we think of the MMO genre.
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Regarding your question on the non-MMO game genre, I think it's important that I differentiate between mobile versus PC. Mobile is a very important and critical genre for us, especially for us to trigger growth in the overseas market. This is a very strategic genre that we must develop. Of course, it will take a bit more time for us to drive some visible results, but this is an area that we've been making investments since quite some time ago. If you look at the non-MMO genre, it comprises of subculture, action-adventure, and strategy and simulation, and puzzle games. If you look at subculture, you would have heard of well-known titles like Onmyoji, Princess Connect, and Uma Musume. Basically, these game titles have been serviced into Japan as well as other regions. Based upon the servicing capabilities that we have been able to build up in Korea and the servicing know-how, we are taking different game titles and expanding them into other regions, including Japan.
You would have also heard of Eversoul. Eversoul also comes under the subculture genre, and we are at this point making appropriate preparations for its global launch, and we're also making preparations for launch into the Japanese market. From a longer-term perspective, this is a very important market and an important game segment for us, and we are planning to continuously expand on investment. In the segment of action-adventure, Guardian Tales is one good illustrative example that we can share. Basically, supported by a successful global service model, we will be making expansions into other markets. Goddess Order will be part of the action-adventure genre as well. We've been going through soft launches and pre-market tests, going through many different processes and stages to actually fine-tune this model and strike the right balance.
There are three other titles that at this point we are in the process of finalizing the sourcing, and we will be able to come back to you with more details once all of those details are ironed out. In terms of Guardian Tales and Goddess Order, I did mention that we've gone through testing as well and balancing and looking into various monetization models and are preparing for live servicing. In terms of strategic simulation games, we have not yet engaged in aggressive investment, but we are looking at a lineup of multiple partners, and in the near future, we will be able to come back to you with more details.
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Lastly, on PC games, there are many studios who've developed not just MMO titles, but also who have expertise in developing shooting games and in developing combat and fighting games. We're very much looking into exploring these other game studios who we could cooperate with in the area of the so-called fighting games. Unlike MMORPG games, what's important for these types of games is the new positioning and also the distinctive characteristic, and the fact that it takes a lot of time for it to strike the right balance and go through the fine-tuning, unlike the massive system underpinning the MMO games. It does take quite a bit of time, and also, compared to the number of development studios that actually try at developing these games, there are a lot of uncertainties that lay in the whole journey up until they actually meet the completion of that game title development.
There is that uncertainty aspect that exists, and we will continuously and closely monitor and collaborate through that process. Another point I want to emphasize is that there are certain titles that we are unable to source domestically, and hence we look towards the global market. We are doing some overseas sourcing. A good example is the license arrangement we have with Path of Exile and also for Stormgate as well, by a studio specializing in RTS game titles. We will continuously develop and closely cooperate with these overseas-based game studios going forward as well, so that we may actually publish those game titles, not just in the Korean market, but in the Asian market as well. We will closely collaborate so that we are able to drive good results.
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Next question please.
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The next question will be presented by Seung-ho Choi from Sangsangin Investment & Securities. Please go ahead with your question.
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I have two questions. First one is a question on Chrono Odyssey. I'd like to understand as to how you are able to win this license to publish this in the market, and what is your expected performance metrics for this game title? And also what is your marketing related schedule? For instance, participating in game trade shows, for instance. And second half of this year, I see that there are many upcoming new titles. So can you provide us with the marketing expense guidance for the second half of the year? And also can you share more color with regards to Project V and other new title projects that you are working on at this point?
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Responding to your question about Chrono Odyssey. This is a game that takes place in a vast open world with dynamic action. It really highlights the dynamic action, and it travels across time and space. This game title is a PC and console-based game. A trailer was released back in December of 2020 through YouTube, and there's been 2.3 million views. In May of 2023, there has also been a second round of trailer release through YouTube, PlayStation, and Xbox platform, and that grossed 4.3 million views. In 2024, during the GDC State of Unreal event, there was another new trailer that was showcased, which grossed 3 million viewership. Already this game title has built up a high level of anticipation across the global player base. From the very moment of sourcing this game, we've gone through multiple trials of tests and interviews. The reason why we believe that this game had great potential, not just for the Korean market, but the global market as a whole, is, number one, we believe that this game has the most optimal content structure together with the buy-to-play package.
We believe that will work best for the PC and for servicing the console game. It also provides an immersive narrative, and it offers the right level of the gameplay maneuvers, and it provides the enhanced UI that the development studio was able to develop through the various different tests. It also offers a high level of freedom in terms of setting the characters as well. Because it provides a highly immersive maneuvering of both time and space, it provides that vast universe. It also provides the actionability commensurate to a single action game. Compared to an MMORPG game, there is much more balancing and fine-tuning that is required for each of the classes and providing the right level of fun in terms of combat and maneuvering action. Because it provides the vast universe and there is a distinctness in its story narrative, and this immense and extensive system has been prepared over a long period of time through this studio, we believe that this was a game that would be able to be quite successful against the global users, and that was the reason why we've decided to source this game.
Because Kakao Games had multiple years of experience servicing games like Black Desert, we have been well assessed for our capabilities in global servicing knowhow. In terms of the mobile launches, we had the infrastructure in place as well as the knowhow. Because this is an area that we as a company have a strong commitment to, we were able to see eye to eye together with the development studio and share the same goal. We believe that we will be able to make this game title into a success. That is the basis upon which we've decided to source and publish this game title. Regarding the marketing aspect, in terms of marketing, close cooperation with the platform providers is extremely important, and we are bound by confidentiality in regards to the timing of the rollout and the method of launch. At this point, we are targeting to release this title to the global market come next year. In terms of all the specifics, we would have to come back to you when the right time comes.
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Hello, I'm Terry. Responding to your question about marketing expense. As you know, Kakao Games, because most of our game title lineup is in the MMO genre and we have experience in live servicing such games, I can tell you, in terms of the efficiency of marketing spending, we are actually at the top. And even for our internal control and internal management aspect, to an extent that there's actually no margin of error in terms of the marketing spend projections. Now regarding the new titles that are to be released going forward, because Kakao Games, we also do concurrent global launches as well. We have been studying into and analyzing various different methodologies and different models when it comes to the marketing expenditure. And we've been able to extract specific areas where we are able to further enhance efficiency based upon our global marketing experience.
So as I said at the very beginning, we are confident that we will be able to control marketing spend within 6% of the total revenue as of full year 2024. To elaborate a little more, compared to the first quarter, we can see a slight edging up of marketing spending in Q2 and Q3, but on a full year basis, that is year 2024 basis, we will be able to control the level of marketing spend at 6%. And that is a figure that also considers a bit of a buffer regarding the marketing spending that may be required for Chrono Odyssey and ArcheAge .
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Next question please.
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The next question will be presented by Lee Hyojin from Meritz Securities. Please go ahead with your question.
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Thank you for taking my question. Thank you for that update on the global publishing initiative. Regarding that domain, a lot of studios are also going into that business. What is the key competitive advantage or the strength that Kakao Games has versus your peers or these other development studios? My second question is regarding CBs, the convertible bond, and also looking at the cash position of the company on a separate basis seems to be a bit tight. What is your financial outlook going forward?
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Regarding our global servicing capabilities, we've built up online servicing capabilities for Black Desert, and we already have a European entity in place. So I can tell you that one of our key foremost assets is having this experience in terms and knowhow regarding live servicing. Secondly, if you look at the recent trend in global publishing, it is true that the different platforms like Steam, PlayStation and Xbox, basically the dependence on acquiring user base on these platforms has risen. That is correct. But there are specific areas that these platform providers cannot offer and specific areas that studios on their own cannot really fill up in terms of their capabilities. And that's where we, Kakao Games, come in. We build our capabilities in that very chasm. There are five different areas that I can highlight from that regard. The first one, if you look at the Western market, what's quite important is the universe, the narrative that this game sits on, the storytelling, the tightly knit plot, and how that actually connects to the gameplay. Making of the universe, the narrative of the game is extremely important. The way we do it is that we get on board from the very beginning of game development, engaging the narrative experts and these editors, and basically that plays as an important strength for us.
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Regarding the second point, in terms of our strengths, we actually can leverage the relationship that we have against the platform providers. If you look at the global market, the console market is almost saturated. So these players want to expand into the Asian market, the big markets of India and China. In order for them to expand into Asia, they need content that will work for the Asian market. As you would know from the titles like Lies of P and Stellar Blade, there has been high level of interest that these players are showing on the Korean development studios. And Kakao Games does not just offer just one single title. We are a company that actually has multiple number of game titles and a company that can actually make long-term commitment. And it is based upon that long-term relationship and commitment that we are able to engage in discussions and negotiations with the platform providers. And because we're not just sourcing or developing just one single game title, we are able to build a long lasting and commitment-based relationship with these other players.
Also, in terms of the third and the fourth strength, this has to do with global servicing. In terms of the games, especially on how people respond to the combat and the action and the maneuvering of the gameplay, the visibility on how the users will respond to this is quite low. So it's quite important for companies to actually test before they are rolled out, and communication with the community is very important. So building up that process is very important. And if you look at the global market, the media coverage is so immense that it is literally impossible to cover everything all at the same time. So what's important is to have a gradual buildup of anticipation of the player base, and that is underpinned by a reliable and trusting relationship between the parties. At Kakao Games, we have been able to build up a core community of global test pool comprising of specialized game groups.
And we have a test pool that we can manage and we can use, and this helps us to build up our reputation as well. And lastly, in terms of PR and marketing and some other issues like hacking, we have specialized agencies that we can forge cooperation with. So depending on the type of the content that is at issue, we will partner up with the right agency and be able to respond to those issues appropriately. All of this is based upon the commitment that Kakao Games as a company can really invest into, and that actually works as a strength for us.
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Regarding your question on our cash position, we have borrowed about KRW 300 billion and used our cash in order to make early repayment of the convertible bond. And because of the borrowing, yes, it did increase the interest burden to a certain extent. But in light of the fact that we have new lineup of games upcoming in MMO as well as other new lineup, and the current MMORPG games, we believe that this is a controllable level, the debt or the borrowing, as well as the interest expense. And we believe that it would not be pressuring the fundamentals, the financial fundamentals of the company. As an objective, Kakao Games, on a separate basis, has set about KRW 250 billion as the baseline for our cash position. And if we need to make any more aggressive investment going forward, we can think about securitizing the equity securities that we have.
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Currently, there are no participants with questions.
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Thank you. This brings us to the end of earnings conference call for Kakao Games with first quarter of 2024. I would like to thank everybody for joining us this morning. Thank you.