Good morning. I'm Lily from Kakao Games IR Department. We will begin the third quarter 2023 earnings presentation. Today, I have with me CEO Leo Cho and CFO Terry. We will first begin with the CFO's presentation on the company's third quarter earnings. As a disclaimer, today's earnings release includes estimates of K-IFRS-based consolidated statements, which may change upon the auditor's review.
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Good morning. This is Terry, the CFO. I will present on the financial highlights of the third quarter 2023. Q3 consolidated revenue of Kakao Games declined 14% year- over- year and 2% Q- over- Q, coming in at KRW 264.7 billion on the back of sluggish non-game business performance, which was impacted by uncertainties of economic recovery. Non-game business generated loss in the third quarter compared to last year's more than KRW 10 billion of operating profit contributions.
As a result, consolidated operating profit of Kakao Games was down by 48% on year and 15% on quarter, reporting KRW 22.6 billion. We expect non-game businesses to recover with resilience once the economy enters the recovery cycle. We are planning to rationalize labor and organizational cost, which were previously aligned with special growth seen during the COVID pandemic, and also withdraw from certain businesses where we see limits to monetization potential so that we may strike the most optimal balance between profit and growth, even in times of prolonged economic downturn.
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Next is on revenue by business breakdown. In PC games, supported by solid user metrics for PUBG, revenue moved in sync with major updates and esports events, with revenue down 13% on year and 3% on quarter, reporting KRW 11.5 billion. A decline in number of titles and regions being served, PC game weakness continues. As it is not a structural issue, we expect to see strong and rapid recovery powered by new title releases. In the global and PC console market, aside from ArcheAge 2 and Swordmaster's Youngest Son, which are the company's longer-term growth momentum, we plan to add on additional lineup in the pipeline for the global market from a wide array of genre, leveraging on the expertise of our internal game studios.
Through such efforts, we will drive performance using proven global IPs from the domestic market so as to regain revenue uptrend in the PC game segment. Although not part of our consolidated subsidiaries, Eternal Return, which is an IP of an affiliate, became a reference point in terms of meaningful performance, and we are in the process of incorporating this experience into the global expansion strategy of Kakao Games. During three years of Early Access servicing, Eternal Return carried out successful enhancements and through close communication with its user base and through the word-of-mouth effect, even in the absence of large-scale marketing, concurrent player count went above 30,000, driving user metrics up by 400% versus before the start of the game servicing. And actually season two update is scheduled for tomorrow, and we look forward to higher growth and successful global expansion in collaboration with Kakao Games.
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Next, mobile game revenue was down 7% year-over-year and up 7% Q-over-Q, recording KRW 183.8 billion. Despite rollout of competing titles on the back of second year anniversary update, Odin has seen user metrics rebound across all of its user groups, which is a clear indication of user support for the game. We will explore ways to trigger revenue momentum while sustaining solid user metrics by offering new content for competition and various class updates for occupation changes.
The downtrend following the initial effect from the launch of ArcheAge War turned to a steady trend triggered by Siege Warfare update and full-fledged content update for massive scale combat. With speedy offering of core content that are true to MMORPG concept, without sacrificing optimal servicing, we were able to solidify loyal base of users and grow the share of mid to top-tier users who enjoy the hardcore play underpinned by top-notch performance. We are also making thorough preparations for Taiwan and Japan as the main target markets for global services. New game elements different from what are typically seen in MMORPG games worked as a constraint initially in broadening the user base for Ares.
The game received raving feedback from users looking for something new as Ares offered its uniqueness in terms of the game universe, cooperative raids, manual play control, and season-based dungeons, showing that it can be competitive in the domestic market. 100-day event end of October and large-scale content updates served as a turning point in gradual rebound of user metrics, upon which we were adding content for cooperation and rivalry between the worlds so that we laid the basis for global expansion and extend the product life cycle in Korea. Dark Gamer was launched both in Korea and global markets as a type of a spin-off to Moonlight Sculptor with a strong emphasis on elements of competition and cooperation.
The game focuses on competition amongst global users, and we are seeing meaningful performance metrics since its rollout. For Uma Musume, we are placing traction behind building loyalty and expanding user base, which is in sync with the revenue momentum cycle due to the nature of the update. While for Eversoul, our focus is on strengthening gameplay and securing content by gaining insight from focus group tests of Japanese users. Now, other revenue, which comprises of non-game business, was impacted by sluggish screen golf equipment market of Kakao VX, and sluggish North America and European markets for Sena Technologies, with Q3 revenue down 28% year-over-year and 21% Q-over-Q, reporting KRW 69.4 billion in total.
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Next is on expense breakdown. Labor cost was up 6% on year and down 5% on quarter, reporting KRW 51.1 billion, on the back of continuing cost optimization efforts across all business segments inside the company. Based on hiring controls, total headcount of Kakao Games on a consolidated basis fell 2% Q- over- Q. In Q4, we will consolidate a game studio with expertise in PC and console games targeting the global market, but expect to see similar level of spending as Q3, in line with the corporate-wide HR optimization plan.
Despite new titles, Ares and Dark Gamer launch in the third quarter, new marketing spend burden was significantly slashed through strategically targeted marketing of Dark Gamer, which drove marketing expense down 37% year-over-year and 36% Q- on- Q to KRW 13.2 billion. As we focused on running the most cost-efficient marketing approach, we do regret of having been somewhat too conservative. We are therefore closely looking for ways to focus marketing strategically in line with major updates and in light of competitive dynamics, while still sustaining the approach towards efficient marketing spend. Commissions paid includes fees paid to marketplace and studios, as well as infrastructure cost, which are impacted by fluctuations in game revenue.
As such, commissions declined 6% on year and up 13% Q- over- Q, reporting KRW 104.3 billion. An increase in fees paid to game studio following publishing of new titles, ratios of commissions against revenue recorded a marginal Q- over- Q rise. Amortization was up 1% year-over-year and Q- on- Q respectively, reaching KRW 21.7 billion, on the back of slight increase in amortization from game licensing fees. Despite a steep decline in non-game revenue, other expense, which includes cost of sales from Kakao VX and Sena Technologies, due to a business structure with higher exposure to fixed cost, other expense decreased 16% year-over-year and 9% Q- on- Q, reporting KRW 51.9 billion.
We are focusing on profitability improvements for the non-game businesses through efficient use of resources and business portfolio rationalization, and not just one-off savings. But in the process, one-off costs are incurred following headcount adjustments and valuation loss on the inventory asset. We are aware that it may act as a burden on consolidated operating profit and overall corporate performance until early next year.
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Together with the focus on diversification of business genre and platform, as well as global expansion, Kakao Games is also committed to ESG management. We've set up working group last year to internalize ESG management capabilities while building out ESG governance, strengthening integrated risk management framework to regularly diagnose and respond to risks, and to establish organization to manage non-financial risk. Following the announcement of our commitment, we released our first ESG report, shedding light on mid to longer term strategic direction and goal.
According to the assessment by KCGS, who's an entity under Korea Exchange, KRX, we received A ratings for environment, A+ for social, and A for governance, well-recognized for industry's top tier performance. We place priority on corporate value enhancements and will continue to dwell over ways to upscale ESG framework and practices, and will continue to communicate such efforts both internally and externally with transparency. We look forward to shareholders' and investors' continued interest and support. That brings me to the end of the presentation on Q3 earnings for Kakao Games. We will now take 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-goo Kim from Kiwoom Securities. Please go ahead with your question.
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Thank you for taking my question, and I appreciate the IR team always sharing relevant information. I just have one question I would like to ask because the information that you've shared with us only shows your new title lineup up until the first half of next year. I would like to gain some insight as to what other new title lineup is in the pipeline.
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This is Leo. Responding to your question. Up until now, we have been building our expertise regarding the domestic business, focusing on the very core MMORPG games and collectible RPG games. Going forward, we will continue to focus on maximizing and improving on the growth potential and securing profitability. At the same time, we'll diversify into various different genres and platforms so that we may be able to achieve a quantum jump on the global market. Up to date, we have focused on projects underpinned by the investments and partnerships that we've been making so far.
And as a result, we have more than 10 titles that are currently within the pipeline, going through different phases of development and going through different phases of market testing, which will enable us to start to release after 2024, various different types of mobile, PC, and console-based games going forward. This will include casual and mid-core genres, including the MMOs, action RPGs, 2D, and looter shooter, which have a high level of acceptance on the global market. We are at this point preparing for services that will best fit the requirements and the demand of North American and European core users, particularly around PC and console platforms.
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We are making the preparation to further broaden our scope of business underpinned by the IPs that we have, in particular the Odin and the ArcheAge IPs. We have all the other mobile game sourcing that is well prepared, which will bring us some global performance. Depending on the type of the game, we will make the decision appropriately and applying the appropriate strategies as to whether a concurrent global launch is appropriate, or whether we should take an approach where we look at the domestic performance and then make the decision for global expansion. Just to cite an example, in the first half of 2024, we're preparing to introduce Goddess Order.
It is a mobile action RPG game based off of 2D dot graphic and supports a horizontal scroll method. Its characteristics is that it provides 100% manual game control and play. It is supported by expansive storyline as well as content, and hence we have very high hopes for a very positive global performance. In terms of many other titles, we actually do have many numerous upcoming mobile titles that is currently under development. It is just that we have not yet finalized on the specific content as well as the timeline for release. It is not that we do not have any under our belt that is being developed. It is just that those information is yet to be confirmed for us to be able to share with you the specifics.
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Just to be a little more detailed. Although this information is not generally shared, we could also look at the development efforts at Lionheart Studio. Project V, at this point, is gearing up for global release. This title is going to be the first mobile new title that will follow Odin release by Lionheart. It is powered by Unreal Engine 5, providing high level and high quality of graphic. It actually leverages off of the Odin's IP, and it is a survival game that brings together the dark fantasy concept as well as a hack and slash, and rogue-like element.
It is based off of the same universe as Odin, and hence it would be a great opportunity for users to once again experience the appealing characters as those monsters and the bosses, which are the game assets or game elements. It will be maximizing the overall growth and skill-related fun factor, and also it will provide a strategic element whereby gamers will be able to combine and make their characters appropriate, depending on the stages that they're in. It offers a very easy gameplay control and a very short play time, providing a broader accessibility to any gamer who wishes to play the game. Currently, our target is to go for a global launch in the first half of next year.
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To elaborate a little more, from a shorter-term perspective, we will first be releasing and showcasing a mobile title, and then consider for a global launch, which will then lead us to a full-fledged diversification into other platforms like PCs and console. XLGames is a game studio that has gained very positive and strong reputation on the global market, and hence there's high level of expectations for the upcoming title, ArcheAge 2.
In the overseas market, Ocean Drive has been able to build up its capabilities and expertise in terms of PC platform-based servicing, and hence we have high level of expectations for an upcoming title dubbed Swordmaster's Youngest Son. Following the Frost Giant real-time strategic simulation game, Stormgate, we also have high expectation for Path of Exile 2, which is a hack and slash game. Our subsidiary, Lionheart, at this point, is developing a game title in the looter shooter genre, including for the PC and console platform. We have a slew of a variety of game titles that's in our pipeline.
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Next question, please.
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The following question will be presented by Seung Hoon Lee from IBK Investment & Securities. Please go ahead with your question.
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Thank you for taking my question. I have two that I want to ask you. First one is, can you provide some more color in terms of the gameplay aspect regarding ArcheAge 2 and the Swordmaster's Youngest Son, which are the upcoming titles, as well as some specific schedule and BM? And what is the company's strategy for console platform going forward, including starting next year?
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Responding to your first question, the growth strategy that Kakao Games has so far been focused on is making investments into the game IPs and expanding that to the global user base. Basically, we've been putting a lot of effort in discovering the relevant IPs that our user base will be familiar with and have been focusing on making investments into such game studios as well as specific IPs. If you look at the market that we are actually targeting, which is the Western PC console market, you see that we see a very high level of royalty to specific IP based games within these markets.
There's a difference with the domestic market, whereby for these Western PC and console markets, they require a support for cross-play. Also the platform model, which is supported by or based on subscription model is what is widely adopted. Hence there is a different types of requirement from these global markets in terms of the usage pattern and the servicing environment. We've been very actively making preparation in terms of strategies to respond to those needs. Since 2019, we've been making investments into many different game studios and have been able to secure game IPs that will bring us global success in the future. A good case in point is XLGames' ArcheAge 2 and Ocean Drive Studio's Swordmaster's Youngest Son, and the projects that make use of these IPs are very good case in point.
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Now looking at ArcheAge 2, basically, we've really tried to incorporate the characteristics that's required by the Western market who are very familiar with playing console platform games and have preference for single play based games. Basically in ArcheAge 1, there was the territory versus territory massive PVP combat, which we boldly gave up and really focused on very sophisticated non-targeted action-based approach where people can really enjoy the fun of strategic targeting. Basically that forms the basis of this single action play.
And on top of that, we have also added a community element whereby players can trade goods and can form guilds and attack a specific dungeon. Also there is that element of dispute and combat between and amongst guilds who wants to attack the other party. Also it is based off of an expansive and quite sophisticated storyline in terms of all the characters and different forces and the guilds and the conflict and the changes. We are preparing a campaign mode whereby people could actually follow the storyline through a character and really indulge in the story.
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From the very onset, ArcheAge 2 was developed with console platform in mind, and at this point, the development is ongoing for both the PC and the console platform. The very core aspects of the gameplay regarding the combat play currently is undergoing a closed test against the Western users, and we will continuously broaden the scope and the size of that test going forward. We will be able to share with you more details on ArcheAge 2 during the gamescom next summer and are making appropriate preparations to make that possible. We are at this point thinking to have a CBT within the year 2024.
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Swordmaster's Youngest Son is a Korean IP. It's a web novel that now has a very big foundation of fandom, and it was serviced through KakaoPage and Radish platform in North America and Piccoma platform in Japan. It has a breadth of foreign fandom and supported by the success of this web novel. It is also being published and serviced as a webtoon as well. Although Swordmaster's Youngest Son is a Korean IP, we are at this point targeting the global market against the Western users. It basically provides an excellent level of combat game control and play, and has a very flamboyant action whereby four people will form a team, cooperate in hunting for monsters in different fields and dungeons.
It is actually a hunting action RPG game title. It also provides combination-based combo action, very speedy, stylish action combats are its key entertainment elements, and basically the game characters will collect different field monsters. Using that element and asset, they are able to further grow their own characters. This provides a team play-based collaboration, competition, conflict, and combat. We are at this point developing some of these community-related assets. It's powered by Unreal Engine 5, providing a high level of high-quality graphics. We also bring in a very familiar aspect that the global users will appreciate, which is the animation art concept, which is supported by, once again, the fantasy backdrop, the fantasy universe, and very flamboyant and speedy action combat is currently being incorporated into this game.
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For Swordmaster's Youngest Son, we are planning to run a small-scale user test by the end of this year, and we will continuously refine the core combat elements. We will prepare so they will be able to showcase the trailers come next summer's gamescom. We believe that the local aspect is quite important, so we will be collaborating with local artists in North America for adaptation of these key core game IP, so that we'll be able to provide a high level of immersiveness and a very high-quality game experience.
In terms of the business model itself, we are considering various different aspects, but we will make sure that we develop a business model that best complies with the global gamers' requirements and the characteristics that we see of the global market. We are at this point very much putting in all of our efforts and investment to bring about good global performance. In terms of the key milestones and the launch-related schedule, we'll be able to share with you more details in the near future.
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Just very briefly, lastly, on the Lionheart Project S. This game is in the looter shooter game genre, and at this point, we are developing for both the PC and the console platform. This game title will offer a very high level of graphic quality. The game is about an open world where a character will be able to use different ammunition and swords during the combat, and will win certain booty and use those assets to further grow its own character.
There's also a taste of RPG in this game as well. The users, based upon their preference, will be able to make use of different costumes and cars, for instance. We will be providing different customizable, personalized items which would meet the demand of global users who require high level of freedom in playing these games. Once again, we will come back to you with more details once they are ready.
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Next question, please.
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The following question will be presented by Donghwan Oh from Samsung Securities. Please go ahead with your question.
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Thank you for taking the question. My first question is, I see that on your non-game business performance from Kakao VX and Sena Technologies was quite poor. I'd like to understand what the company's strategy is going forward for these businesses and what are your plans. Second question is the new upcoming title ROM, R-O-M. I think as an MMORPG game, this game is quite comparable to Ares and Odin. So what is the headcount use like for developing this game and the amount of development fee that had been incurred? It would be helpful if you provide that comparison.
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This is the CFO responding to your question on non-game business. At this point for Kakao VX, we're focusing on slashing the fixed cost as this company is under a contingency management situation. We are at this point very much focused on business process efficiency up until early beginning of next year. Our plan going forward is to reshuffle the overall business portfolio and focus our efforts on the core business. We're in the process of making a decision with regards to certain businesses where there is less amount of potential for monetization, either slash the size of those businesses or completely withdraw from those businesses.
We are at this point in the middle of that decision-making process. Looking at Kakao VX, the screen golf business was considered one of the key earnings sources. At this point in time, due to the uncertainties in when the economic rebound will take place, we're taking a very prudent approach. In terms of the operational strategy going forward, another very key pillar of the VX business is the booking platform, the golf course booking platform. At this point, we are number one in terms of the overall traffic in the market, but we want to take on a more prudent approach in monetizing this business.
We will be focusing on the golf booking platform as one aspect and also wait for the right timing for the screen golf business to rebound. Just to add on that, we will be driving that rebound in the screen golf business with the new product introduction that will take place in the near future. We're also considering global expansion for this business as well.
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Next is Sena Technologies. The core market for this company is North America and Europe. At this point, we have been actually in the past preparing to enter into the Chinese market to drive further growth. But at this point, we are mindful of the speed at which we go into the Chinese market, and we're focused on controlling the cost as well, so that we may be able to improve on the profitability of the business. Now then, when will the business rebound for Sena Technologies? It would, of course, depend on the overall market sentiment that we see from North America and Europe.
Considering that this company had a quite long history and it has previous experience of overcoming difficult crises, I do not feel that we need to be overly concerned about the earnings capability of Sena Technologies. Also, one of the key products that they produce is a Motorcycle Headset, and we will have an upgrade launch for the first time in three years. I believe that once this new product comes out into the market, unless the overall market is further depressed, we can look forward to some positive performance come next year.
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Responding to your question on ROM: Remember of Majesty. Basically, this game adopts a quarter view perspective. It is a classic mobile hardcore MMORPG offering very high level of freedom and strategic siege warfare. Our objective is to provide satisfaction to the adult hardcore user base. At this point, we're looking at concurrent release of this game across the global markets. By providing a real-time translation of the chatting messages as well as global statistics, we want to be able to provide entertainment to the global users so that they could really experience the fun of competing and cooperating through the siege warfare.
We will also support low specification for the benefit of the overall global market and will provide a very steady play to all of our global users. Basically, this game studio does a very good job of making core MMO game titles and also has a previous experience of successfully servicing such games. In collaboration with Kakao Games, we will conduct this business jointly together. The game studio will be the one that will operate this game directly. We are also thinking of broadening and providing a more broadened trading system, whereby we can really facilitate the need for different transactions amongst different players.
The business model that we are envisioning is going to be very simple so that we could facilitate the want or people's desire to want to engage in transactions, which will support the long-term traffic and bring us performance going forward. We believe that there is a big potential user base for this type of a game, although at this point it's hard to predict the specific outcome from the launch of ROM. I can tell you that we have expectations and hopes for this game.
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Thank you. That brings us to the end of Kakao Games Q3 2023 Earnings Conference Call. Thank you once again for joining us this morning.